Zacks Industry Outlook Highlights: Colgate Palmolive, Kimberly-Clark Corporation, Procter & Gamble, PepsiCo and HJ Heinz

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Oct 14, 2011, 09:30 ET

CHICAGO, Oct. 14, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Consumer Staples, including Colgate Palmolive Co. (NYSE: CL), Kimberly-Clark Corporation (NYSE: KMB), Procter & Gamble Co. (NYSE: PG), PepsiCo Inc. (NYSE: PEP)) and HJ Heinz Co. (NYSE: HNZ).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at

http://www.zacks.com/stock/news/62623/Consumer+Staples+Stock+Outlook+-+Oct.+2011

Stocks in the Consumer Staples sector performed their traditional defensive role as the broader equity markets came under pressure in response to concerns over Europe's sovereign debt crisis and a weak U.S. economy. The fundamental explanation is that food, beverage, household products and cosmetics companies that manufacture and market consumable products, most of which are considered essential to daily life, such as food, drink, toothpaste, deodorants, toilet paper, etc.

As of September 18, 2011 the consumer staples sector represented 11.8% of the S&P 500 Index, up 0.4%, compared with a 10.7% drop for the S&P 500. In 2010, the sector index grew 10.7% versus a 12.8% increase for the S&P 500 index. But with the market shifting gear and starting to move up again over the last few trading sessions, this defensive sector is expected to be unable to keep pace.

Road Ahead

As referred to earlier, the macro-economic environment remains uncertain. However, we have seen that product demands have remained relatively stable.

Going ahead, beverage companies, which make up 22.2% of the sector's market value, are expected to grow faster -- in the mid single-digit to high single-digit range -- displaying the benefits of volume growth and effective net pricing. On the other hand, cosmetics companies can grow their earnings from higher-margin product launches and effective advertising spending.

However, the essentially jobless recovery that defined 2010 has lingered through 2011. Further, worsening the situation is the high food inflation. In this environment, the less expensive private label goods are expected to attract consumers, thereby limiting the growth potential of branded food companies.

Further, the substantial rise in raw material prices remains a drag on margins of most of the companies in this sector. We have seen this trend with Colgate Palmolive Co. (NYSE: CL), Kimberly-Clark Corporation (NYSE: KMB) and Procter & Gamble Co. (NYSE: PG) in recent days.

Therefore, to survive in the environment of escalating prices, many companies in the consumer staples sector have "right-sized" portions and packaging of their products to pass on the higher prices to consumers. PepsiCo Inc. (NYSE: PEP) had reduced the Lay's "Family Size" potato-chip bag from 16 ounces to 14 ounces in 2009, due to rising grain prices. HJ Heinz Co. (NYSE: HNZ) has reduced the portions of its several products, including its flagship Heinz 57 sauce, which now comes in a 4-ounce smaller package with no reduction in price. The reason behind this reduction remains the rising cost of wholesale tomatoes, which have more than tripled in 2010 from the previous year.

It is expected that higher wheat costs will begin to affect cereal and bakery product prices over the next few months, causing prices to rise 3.5% to 4.5% overall in 2011.

In spite of the price hike, these companies bring out new innovative products to cater to the ever-changing demands of customers.

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