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Consumer Staples Outlook - April 2018

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The Consumer Staples sector includes companies that provide necessities and products used in daily lives, thus proving to be a defensive zone. With firms providing food, beverages, soap and cleaning materials and products related to beauty and personal care among others, consumer staples is always go-to place for investors who want to play it safe during economic downturns.

In fact, tobacco and alcohol players usually do well when economic conditions are not congenial. Clearly, adding stocks from the consumer staples basket usually lends more stability to investors’ portfolios. Moreover, the sector remains a lucrative space for income-seeking investors, given its strong dividend yield and growth rate.

Before analyzing the trends of the consumer staples space, let’s take a look at the U.S. economy – which appears to be quite well placed. We believe that favorable economic indicators like consumer spending and consumer confidence, among others, are likely to benefit consumer-driven staples companies.

U.S. Economic Picture Looks Rosy

The overall economy appears to be in decent shape thanks to favorable consumer spending, a strong labor market, rising government expenditures and increased consumer confidence. Notably, the Consumer Confidence Index rose to 128.7 for April, in comparison to 127.0 in March. Moreover, the unemployment level has remained at a 17-year low of 4.1% for six months in a row now.

Clearly, these factors give positive signals for consumer staples companies, most of which are also likely to gain from President Trump’s tax cuts. In fact, during the last quarter, several companies raised their full-year earnings outlooks, on the back of expected gains from tax reforms.

Is Everything Perfect for Consumer Staples?

Courtesy of the favorable economic conditions, consumer-driven companies appear well placed. However, the possibility of a trade war with China continues to raise fears for companies whose business operations are likely to be hit by tariffs. Also, apprehensions remain related to three or more rate hikes by Fed this year, as these may weigh on consumer spending and make the dollar stronger against other currencies. This poses threats to companies with significant exposure to emerging markets.

Speaking of emerging markets, consumer staples garner significant revenues from these regions. While some emerging markets are witnessing improved trends, exchange rate volatility and other global risks remain. Moreover, intense competition, price wars and a high promotional environment pose threats to margins. Additionally, greater marketing costs, along with volatile input prices and higher freight expenses, remain concerns for the sector that has lost 6.2% in the past six months, in comparison to the S&P 500’s gain of 4%.

Nevertheless, the companies are undertaking aggressive efforts to curtail costs and keep pace with shifting consumer patterns. With regard to the latter, the sector players remain committed to adopting the e-commerce mantra, alongside adding organic products to their portfolios. Also, consumer staple players should continue gaining from solid focus on innovation, product launches and strategic buyouts. Given all the pros and cons, let’s see how the Zacks Consumer Staples sector is placed.

Consumer Staples Sector – Favorable

Stocks in the Consumer Staples sector have been laggards lately, with the sector lagging the S&P 500 index in the year-to-date and trailing 12-month period. The sector has lost 4.3% of its value in the past year, under-performing the S&P 500 index’s +12.9% gain.

The sector’s valuation picture has improved following recent weakness, with the sector currently trading at 21.6X trailing 12-month earnings. The sector was trading at 24.3X in January 2018 and 25.8X in May 2017.

Over the last 5 years, the Consumer Staples sector has traded as high as 25.9X trailing 12-month earnings and as low as 19.5X, with a 5-year median of 21.7X.

The sector has always traded at a valuation premium to the S&P 500 index, though the premium commanded at present is one of the lowest in recent years. The S&P 500 index is currently trading at 20.4X trailing 12-month earnings, with the index’s 5-year high, low and median at 21.9X, 15.3X and 18X, respectively. 

All in all, the sector appears attractive on valuation grounds.

Zacks Industry Rank – Positive

Within the Zacks Industry classification, Consumer Staples is one of the 16 Zacks sectors, which is further sub-divided into 16 industries at the expanded (or “X”) level – Publishing - Periodicals, Textile - Apparel, Food - Meat Products, Funeral Services, Publishing -Books, Food – Dairy Products, Publishing -Newspapers, Food -Confectionery, Beverages - Alcohol, Food - Miscellaneous, Soap and Cleaning Materials, Agriculture - Operations, Tobacco, Beverages - Soft Drinks, Consumer Products - Staples and Cosmetics.

We rank all the 250 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies. We put our X industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. To learn more visit: About Zacks Industry Rank.

The Zacks Industry Rank is #15 for Agriculture - Operations (top 6%), #18 for Food - Meat Products (top 7%), #54 for Publishing - Books (top 21%), #95 for Consumer Products - Staples (top 37%), Cosmetics (top 37%) and Textile - Apparel (top 37%), #115 for Publishing - Periodicals (top 45%), Funeral Services (top 45%) and Food Confectionery (top 45%), #169 for Beverages - Alcohol (bottom 34%), #183 for Food - Miscellaneous (bottom 29%), #204 for Publishing - Newspapers (bottom 20%),  #212 for Tobacco (bottom 17%),  #219 for Beverages - Soft Drinks (bottom 14%) and #247 for Soap and Cleaning Materials (bottom 4%).

On analyzing the Zacks Industry Rank for the constituent industries in this space, it is apparent that the overall outlook for the Consumer Staples sector is close to Positive.

Sector Level Earnings Trends

The Q1 earnings season is in full swing. Out of the 16 Zacks sectors, 14 are expected to witness positive earnings growth, with Consumer Staples being one of them. Markedly, total Q1 earnings for the sector are expected to be up 6.2% on a 2.8% increase in revenues. This will follow 9.3% earnings growth and 2.3% revenue upside registered in Q4.

For more details on earnings of this sector and others, please read our Earnings Preview report.

Consumer Staples Stocks Worth Buying Right Now

The impressive picture for the consumer staples sector might push stocks in the space higher. While the headwinds looming over the space should not be ignored, one can consider buying stocks that carry a favorable Zacks Rank. Here are few stocks you may want to consider:

Archer Daniels Midland Company (ADM - Free Report) : This Zacks Rank #1 (Strong Buy) stock has rallied about 5.6% in six months. The stock’s earnings estimates for the current year have been revised roughly 1.7% upward over the last 30 days.

Blue Buffalo Pet Products, Inc. BUFF: This Zacks Rank #1 stock has gained 37.6% in the past six months. Earnings estimates for the current year have been revised upward by 2 cents over the last 30 days.

Lamb Weston Holdings Inc. (LW - Free Report) : A 5.7% upward revision in earnings estimates for the current fiscal year over the past 30 days led to a Zacks Rank #2 (Buy) for this stock. The stock has jumped 30.2% in six months.

WD-40 Company (WDFC - Free Report) : This Zacks Rank #2 stock has gained 20.3% in the past six months. Earnings estimates for the current fiscal year have been revised nearly 3.8% upward over the last 30 days.

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