Stocks in the Consumer Staples sector have traditionally performed better than the stock market, and especially cyclical companies, during market declines. We are seeing evidence of this at present -- consumer staple stocks have started shining again as concerns about the economy's growth momentum have taken center stage.
The fundamental explanation for this behavior is that food, beverage, household products and cosmetics companies manufacture and market brand name consumable products, most of which are considered essential to daily life, such as food, drink, toothpaste, deodorants, toilet paper, etc.
Since product demand is relatively stable, the companies generally report earnings in line with expectations.
Beverage companies, however, are able to grow faster at the high single-digit to low double-digit rate given growing penetration rates. But, cosmetics companies can grow earnings a percentage point or two above beverage companies, because they are able to differentiate their products.
We are more or less Neutral on the stocks in this sector. Though temporarily impacted by inflation, these companies are cash rich and can withstand the current economic headwinds. Procter & Gamble (NYSE: PG) is one of the strongest and most financially sound companies in the consumer staples sector. The company generated approximately $3.2 billion in free cash flow with a free cash flow productivity of 113%.
Although the global market growth was a meager 3% for the most recently reported quarter, Procter & Gamble continues to see healthy growth rates in developing markets in the range of 6% to 8%. However, margins were impacted by higher commodity costs. Higher commodity costs compared with the year-ago quarter led to a 200 bp margin contraction in the last quarter.
In the most recent quarter, global net sales of Colgate Palmolive (NYSE: CL) increased 4.5% year over year to $4.0 billion despite a 3% benefit from foreign exchange and a 2% addition from global unit volume, which was offset by a 0.5% decline in pricing.
On an organic basis (excluding foreign exchange, acquisitions and divestitures), sales increased 1.5% in the quarter, with gross profit increasing by 2.8% to $2.3 billion. Gross profit margin declined by 80 basis points to 58.4% compared with the prior-year quarter, as higher material costs and steep promotional investments undid the benefits of cost-saving initiatives.
Kimberly-Clark (NYSE: KMB) is one of the world's leading manufacturers of health and hygiene products, and commands a strong portfolio of well-established brands. In the most recent quarter, the company reported lower than expected results. The margins were also impacted by higher costs of raw materials.
Further, the company assumes inflation to be in the range of $450 million to $550 million. The increased inflation assumption is primarily due to higher costs for virgin pulp, polymer resin and most other oil-based materials. Although, on a long term basis we are Neutral on the stock, on a short term basis the stock has a Zacks #4 Rank which implies a Sell rating on the stock.
Altria Group (NYSE: MO) reported modest results for the first quarter of 2011. Although earnings grew 4.8% year over year, it was in line with the Zacks Consensus Estimate.
Further, revenues also contracted 2.0% to $5.6 billion. The decline was attributable to lower net revenues from cigarettes and cigars, partially offset by higher net revenues from smokeless products, financial services and wine. Excluding excise taxes, revenues were flat year-over-year at $3.9 billion.
Management at Altria stated that the business environment for 2011 is expected to remain challenging. This is because adult consumers remain under economic pressure and face high unemployment. In addition, Altria's tobacco operating companies also face a number of challenges as they enter 2011.
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