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Retail Sales Just as Predicted
Weaker-than-expected retails sales for December confirm our concern for the Consumer Staples sector in 2009. Negative earnings revisions are expected as consumers curtail spending. The loss of 2.6 million jobs in 2008 and the decline of consumer wealth (in both housing and equities) have eroded consumer confidence. The consumer is pulling back and trading down to generic products.
Also today, consumer spending in the third quarter was revised downwards to a decline of 3.8% versus the previous estimate of down 3.1%. American consumers are reducing expenditures, and as a result, the branded Consumer Staples companies will experience margin pressure that should result in P/E multiple contraction.
With the Consumer Staples sector having outperformed the market on a total return basis for three consecutive years, the positive performance disparity is long-in-the-tooth. In 2009, it is highly probable that Consumer Staples will underperform despite the perceived defensive characteristics of the group. Rather, focus on companies with strong cash flow, below average debt levels and a secure dividend with a yield above 4.5%, such as Kraft (KFT - Analyst Report) in the mid-20’s.
Read the full analyst report on KFT.
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| Market Summary | Jul 31, 2010 13:12 pm ET |
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