The consumer staples sector has been generally weak over the past few quarters due to a difficult consumer spending environment that emanated from slow job growth, high interest rates and tightened credit availability. In addition, difficult operating conditions in Europe and a slowdown in some Asian countries like China are also posing threat to growth. Moreover, tax increases and higher healthcare costs will further hurt consumer discretionary spending.
Accordingly, stocks of most consumer giants like The Coca-Cola Company (KO - Analyst Report), The Procter & Gamble Company (PG - Analyst Report), General Mills, Inc. (GIS - Analyst Report) and Kellogg Company (K - Analyst Report) have been witnessing dismal quarterly performances and consequent pressure on their share prices. Most of the large consumer staples stocks are somehow managing to increase their earnings on the back of cost controls and share buybacks, but only a few have been able to deliver impressive top-line growth – thus signaling a lack of real growth.
Moreover, the consumer staples sector is expected to account for only 6.8% share of the S&P 500 index earnings in 2013, while it accounts for 8% of the total market capitalization.
The Three Stocks Still Look Promising
Despite all the headwinds, there are three names which we believe will still do well and are worth buying. These include coffee giant Starbucks Corporation (SBUX - Analyst Report), meat processor Tyson Foods, Inc. (TSN - Analyst Report) and food manufacturer The J. M. Smucker Company (SJM - Analyst Report). All of them carry a Zacks Rank #2 (Buy).
Smucker has been delivering solid results for the past few quarters and also has a favorable outlook for the year. We are encouraged by Smucker’s regular product innovations, strategic acquisitions, improving volumes and frequent dividend increases and share buybacks.
Moreover, its key partnerships with Dunkin Brands Group, Inc. (DNKN - Analyst Report) (to produce Dunkin' Donuts packaged coffee brand) and with Green Mountain Coffee Roasters (to produce coffee brands for its popular K-Cups used in Keurig brewers) provide significant growth opportunities. On the valuation front, a price-to-book (P/B) ratio of just 1.97 suggests that the stock is still undervalued.
Tyson Foods’ chicken business has gained significant momentum recently as an increasing number of health-conscious consumers are opting for chicken instead of red meat because of the associated health risks with the latter. Tyson also has a solid product pipeline of innovative and high-quality whole-grain and gluten free items to meet the changing consumer demand for low-calorie and healthier foods.
In addition, continuously falling corn prices (which is the main feed for chicken) and favorable climate will act as solid tailwinds in the next few quarters. With low valuation metrics, including a price-to-sales (P/S) ratio of just 0.3, price-to-earnings (P/E) ratio of 12.91 and price-to-book value (P/B) ratio of 1.57, this stock offers a solid buying opportunity.
Though the last two quarters were a bit sluggish for Starbucks, it has bright prospects in the long term banking on its evolving North American business, rapid international expansion, successful loyalty programs and innovations (both beverage and food), and solid operating leverage. Starbucks has compelling growth drivers like the La Boulange bakery items, Verismo at-home coffee machine, Teavana tea and K-Cups portion packs to sustain earnings momentum in the upcoming quarters.
Shares of Starbucks are going for about 30.9x the estimate for 2013. Though the stock looks a bit pricey, it should not disappoint investors given the company’s long-term expected earnings growth of 18.4% and return-on equity of 28.4%.
Importantly, with a good Zacks Rank and positive earnings ESP (Read: Zacks Earnings ESP: A Better Method), these three companies are expected to beat the Zacks Consensus Estimate when they report earnings later this month or early next month.