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Tags: consumer | staples | cheaper | bond | yield

Consumer Staples Got Cheaper as Bond Yield Rose

Consumer Staples Got Cheaper as Bond Yield Rose

Dr. Edward Yardeni By Thursday, 31 May 2018 08:20 AM EDT Current | Bio | Archive

Consumer Staples: Time To Clean Up? Soap isn’t a complex product. It’s something humans have been using for centuries. Yet there’s an inordinate variety on the market. There’s soap for your hands and soap for your body. There’s bar soap and liquid soap. Soaps have different scents. Some fight bacteria, and some are “natural.”

Walmart sells soap from 19 different brands online, including but not limited to: Dial, Dove, Irish Spring Zest, Softsoap, Ivory, Olay, Lever 2000, Coast, Yardley London, Caress, SheaMoisture, Mrs. Meyer’s, Tom’s of Maine, Safeguard, JR Watkins, Equate, Jergens, and Tone.

Despite the vast array of soap offerings from companies in the S&P 500 Consumer Staples sector, the sector has had a horrible year in the stock market, falling 13.2% ytd. That makes it the worst-performing sector in the S&P 500. Here’s the performance derby for S&P 500 sectors ytd through Tuesday’s close: Tech (9.8%), Consumer Discretionary (6.7), Energy (2.4), S&P 500 (0.6), Health Care (-0.8), Industrials (-2.0), Financials (-3.9), Materials (-4.3), Utilities (-4.7), Real Estate (-5.6), Telecom Services (-12.3), and Consumer Staples (-13.2) (Fig. 1).

The Consumer Staples sector peaked at a record high on January 26 and proceeded to fall as interest rates backed up and created competition for the sector’s healthy dividend yield. The sector also ran into trouble as Amazon bought Whole Foods and made a push into supplying staples at low prices. In addition, German discount grocers Lidl and Aldi have targeted the US market for expansion making the market ripe for a price war. The S&P 500 Household Products industry’s stock price index has fallen 17.4% ytd, Tobacco is 23.6% lower and the Brewers have dropped 25.0%, making them among the worst-performing industries that we track in the S&P 500.

But this is a market that likes to rotate, and it may be time for the Staples sector to clean up. Just in the past week, as the 10-year Treasury bond yield slipped from 3.11% on May 17 to 2.77% on Tuesday, the Consumer Staples sector, along with other sectors that are bond proxies and safety stocks, started to rally. Here’s how the sectors have performed for the one week through Tuesday’s close: Utilities (2.1%), Real Estate (1.1), Consumer Discretionary (0.4), Consumer Staples (0.3), Tech (0.1), Telecom Services (-1.0), Health Care (-1.2), S&P 500 (-1.3), Industrials (-1.4), Materials (-2.9), Energy (-4.5), and Financials (-5.0) Table 1.

This outperformance could continue if the Treasury bond yield remains around 3.00%. Let’s take a look at some of the aggressive moves S&P 500 Consumer Staples companies are taking to break out of their slump:

(1) Getting hipper. The best consumer products companies aren’t taking their sector’s woes sitting down. They’ve started shaking up their product offerings, often by buying new, hip brands that appeal to the younger, healthier set, and selling tired offerings. Acquisitions ideally bring in brands that grow faster or have wider margins than the acquirer’s existing lines of business.

When Colgate-Palmolive made acquisitions late last year, it opted to buy companies in the professional skin care business, PCA skin and EltaMD. The manufacturer of Irish Spring and Softsoap explained in its press release: “PCA Skin is a leader in medical-grade in-office and take-home skin care products, and has strong support from dermatologists, plastic surgeons and aestheticians. EltaMD is a leading physician-dispensed sun care brand with a unique positioning around broad-spectrum, everyday use, physician-dispensed sunscreen.”

Likewise, when Procter & Gamble made an acquisition last month, it purchased the consumer-health business of Germany’s Merck KGaA for $4.2 billion. P&G, which manufactures Ivory and Olay in addition to many other consumer products, adds vitamins and food supplements to its list of offerings through the acquisition.

Colgate shares have fallen 15.8% ytd, while Procter & Gamble’s shares have lost 19.4%. Both companies are members of the S&P 500 Household Products stock price index, which has fallen 17.4% ytd (Fig. 2). The S&P 500 Household Products industry is expected to grow revenue 3.4% this year and 2.6% in 2019 (Fig. 3). Analysts forecast earnings will grow 8.7% this year and 6.5% next year (Fig. 4). The industry’s forward P/E has fallen from a peak of 22.9 in February 2017 to 17.0 (Fig. 5).

(2) Pepsi goes Bare. PepsiCo announced last week plans to buy Bare Snacks, which makes chips out of baked fruits and vegetables. The company “was founded in 2001 by a family-owned organic apple farm in Washington, that began selling packaged baked apple chips in local farmers’ markets,” the press release states. The company will continue to operate independently from its headquarters in San Francisco after the deal closes.

Rival Coca-Cola is turning to alcohol. The company launched a “fizzy lemon-flavored alcoholic drink” in Japan this week. The drink, Lemon-Do, will come in a can and targets both men and women drinkers. While the company owned a winery from 1977 to 1983, this is the first time it has sold an alcoholic drink to consumers. The company also recently introduced new flavors of Diet Coke in North America that gave Q1 beverage sales a boost.

Despite recent innovation and acquisitions, Pepsi shares are down 15.7% ytd, and Coke shares have dropped 7.0%. Both companies are members of the S&P 500 Soft Drinks stock price index, which is down 10.4% ytd (Fig. 6). The industry’s revenue is expected to drop 0.6% this year and increase 3.6% in 2019 (Fig. 7). Earnings in the Soft Drinks industry are still expected to increase 10.1% this year and 8.0% next year, as the industry’s profit margins have improved in recent years (Fig. 8) and (Fig. 9). The Soft Drinks’ forward P/E has fallen to 18.9, down sharply from a recent peak of 23.0 in August 2017 (Fig. 10).

(3) Going to the dogs. Some consumer companies are looking to the four-legged set for redemption. J.M. Smucker purchased earlier this month Ainsworth Pet Nutrition for $1.7 billion and sold its US baking business, including the Pillsbury and Hungry Jack pancake mix brands.

Two-thirds of Ainsworth’s sales come from the Rachael Ray Nutrish brand of premium pet food. Smucker already had exposure to the pet business after buying Big Heart Pet Brands three years ago for $3.2 billion. The deal brought Meow Mix, Milk-Bone, Kibbles ‘n Bits, Natural Balance and Nature’s Recipe brands into the Smucker fold.

Smucker isn’t the only consumer company going to the dogs. “Other big food makers are adding pets to their product lines, too. General Mills Inc. said in February it would buy pet-food maker Blue Buffalo Pet Products Inc. for $8 billion as sales of its cereals and yogurts have stagnated. Mars Inc. last year bought veterinary and dog day-care company VCA Inc. for $7.7 billion,” a 4/4 WSJ article reported.

General Mills’ shares are down 28.4% ytd through Tuesday’s close, while Smucker’s shares have fallen 12.5%. Both companies are members of the S&P 500 Packaged Foods & Meats stock price index, which has fallen 14.7% ytd (Fig. 11). The industry is expected to grow revenue by 6.0% in 2018 and 2.6% next year (Fig. 12). In line with that, analysts forecast earnings growth of 11.2% this year and 5.7% in 2019 (Fig. 13). The P/E in the Packaged Foods & Meats industry has dropped sharply to 14.4 from a recent peak of 22.2 in July 2016 (Fig. 14).

(4) Kroger gets cooking. With new players swarming into the grocery business, Kroger opted to increase its bet on the private meal-kit business by buying Home Chef for $200 million initially and up to $700 million if Home Chef hits performance targets. The business will combine with Kroger’s existing meal-kit business, Prep+Pared meal kits.

Announced last week, the deal follows Albertsons’ purchase of Plated last year. “Pentallect Inc., the food consultancy, projects that the multibillion-dollar meal-kit market will continue to grow at about 20% annually,” a 5/23 WSJ article reported.

The acquisition follows Kroger’s purchase earlier this month of a $250 million stake in British online grocer Ocado Group. Kroger will increase its stake in Ocado to more than 6%, and it will license from Ocado technology that runs automated warehouses and processes online orders. Kroger will build three warehouses in the US this year and 20 warehouses within three years, and Ocado will operate them.

Kroger is the sole member of the S&P 500 Food Retail index, which has fallen 10.7% ytd (Fig. 15). Analysts have written off this year’s results, but are more optimistic about 2019. In 2018, the industry’s revenue is expected to be flat, and earnings are forecast to rise 1.3%. But next year, analysts expect revenue to improve by 3.0% and earnings to jump 8.6% (Fig. 16 and Fig. 17). This industry’s forward P/E has also shrunk to a below-market 11.6 ever since reaching a peak of 22.7 in February 2015 (Fig. 18).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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The Consumer Staples sector peaked at a record high on January 26 and proceeded to fall as interest rates backed up and created competition for the sector’s healthy dividend yield.
consumer, staples, cheaper, bond, yield
Thursday, 31 May 2018 08:20 AM
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