Gérard Moulin has been managing the Amplegest Pricing Power fund for 17 years. Launched in 2005 with €400,000--“the legal minimum to launch a mutual fund in France at the time”--the fund has seen its assets multiply by 1,000 to reach €440m today--“half a billion dollars”--and over the last four years, assets have tripled. “It’s a fund that has found its audience and is in the direction of making history,” he says.

The starting point is an observation: “There are companies that have more visibility than the average and that regularly deliver results that are better than or equal to forecasts. This, considering that the mechanics of making money on the stock market is to take advantage of what is not in the price, is a very good thing.”

Moulin very quickly realised that these companies, which had were able to propose something new to the markets, all had barriers to entry and competitive advantages that were above average and that their common point was their ability to impose their prices on their clients. In other words, pricing power. No one knows how to give a definition that would be accepted by all.

The right balance of power with clients

For Amplegest, this definition would be “companies that are in a relationship of strength with their clients”. “But what counts is to have a method with which we are comfortable over time,” he adds.

How, “as a financier”, can you detect this pricing power? You have to look at the income statement, says Moulin.

On a balance sheet, you will of course find the capacity to generate cash flow and the progression of intangible assets. “But these are only consequences.” He reckons that the main criteria are the evolution of turnover; the evolution of the growth of these groups at constant perimeters and exchange rates; the evolution of the operating margin’ and the ratio of value to growing income (PEG for price/earnings to growth). These are all criteria that must be assessed over the long term. “It is because we are exacting over several years that we will be able to find the exceptional groups and avoid ‘fake friends’.”

Moulin says that a great company is one that is reliable in its forecasts, that puts pressure on its competitors’ margins, constantly guarantees market share and creates value.

Valuations accepted by the market

Beware, however, that while pricing power is a guarantee of longevity for a company, it is not eternal. “It is a temporary state.” And the situation can quickly be reversed. Hence the need to constantly monitor the evolution of the competitive game.

The value of a pricing power strategy is not debatable. “A company that is able to set its prices protects its growth and its margin. In this way, it is free of economic cycles and adapts to the changes of the times. In a context of disinflation, exacerbated competition, price wars and consumer infidelity, this is a strategic challenge.”

Faced with such rare pearls, the question of the valuation of these companies inevitably arises. This is a non-issue for Moulin, who believes that whatever the economic phase, the valuation of these securities is accepted by the market. “The raw material of a company is its activity, its growth. So how much is a single company worth?” He points out however that the fund has set some limits. “We don’t over-anticipate profits. And we like dynamics. As long as a company has acceleration in its profitability, the market will want it.”

Originally published in French by and translated for Delano