[Beginner's Guide to Stock Investing] Why Are Stock Prices Rising Even Though Product Prices Are Increasing?

[Asia Economy Reporter Kwon Jaehee] "After raising ramen prices, @@ Food achieves strong earnings"

You may have seen an article with a headline like this at least once. Companies that raise product prices usually see their stock prices rise. At first glance, this might seem strange. If product prices go up, consumers would dislike it, yet the stock price rises? But if you think about it again, price increases are actually positive news for stock prices. Let's find out why.

Company Report Card: What is Operating Profit?

First, let's understand the concept of operating profit. During earnings season, companies announce their sales and operating profits. Simply put, sales revenue is the total amount a company earns through its business activities. On the other hand, operating profit is what remains after subtracting operating expenses (cost of goods sold, selling and administrative expenses, etc.) from sales revenue. In other words, operating profit = sales revenue - expenses, and this operating profit serves as the company's report card.

How can a company increase its profit? There are mainly two ways: sell more or sell at a higher price.

Samyang Foods Raises Ramen Prices, Achieves Record-Breaking Earnings

On May 1, 2017, Samyang Foods, famous for its ramen, raised ramen prices by 5.4%. Samyang Ramen increased from 760 won to 810 won, a 6.5% increase, and Buldak Bokkeum Myun (Hot Chicken Flavor Ramen) rose from 1,000 won to 1,050 won, a 5% increase. This was the first price increase in four years since 2012. The company explained that the move was inevitable due to rising costs in labor, logistics, and raw materials, but consumer reactions were not favorable.

However, from the perspective of the company and investors, this acted as positive news. Even a small price increase causes sales and profits to surge.

In fact, after the price increase, Samyang Foods' quarterly operating profit jumped from 7 to 9 billion won in 2016 to 10 to 18 billion won in 2017.

The stock price also responded. The stock, which traded between 40,000 and 50,000 won in 2016, approached 100,000 won by the end of 2017.

Of course, the popularity of Buldak Bokkeum Myun in China played a significant role, but the price increase undeniably led to improved earnings.

Does a product price increase always lead to a stock price rise?

No. This applies only to B2C (Business to Customer) companies targeting consumers. For B2B companies that trade between businesses, price increases are difficult. Imagine a company supplying parts to Samsung Electronics' mobile phones. Price reductions are common between such companies because they need to offer more competitive prices to win contracts.

But B2C companies are different. Products like TVs tend to decrease in price over time due to cost reductions from technological innovation, but consumer goods tend to increase in price in line with inflation. From the consumer's perspective, price increases are burdensome, but from the company and investor perspective, price increases lead to higher sales, which directly translates into profits, making it welcome news.

Hyundai Motor's Stock Price Soars Thanks to the Genesis Effect

In the second half of 2020, Hyundai Motor saw a surge in sales of its luxury brand Genesis, which also raised the average selling price. Both selling price and sales volume increased simultaneously, causing the stock price to soar by as much as 80% over July and August 2020.

Investors need to think differently from consumers. It is important to evaluate profits and losses from the company's perspective. While price increases may feel unpleasant to consumers, once you switch to an investor mindset, it becomes positive news that drives stock price increases.