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Consumer Products Industry Outlook: Soft Margin Blurs Prospects

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The Zacks Consumer Products – Staples industry comprises manufacturers, marketers and distributors of a variety of consumer products, including personal care items, stationery, bed and bath products, cleaning equipment and household goods like kitchen appliances, cutlery and food storage among others. Some of the industry participants provide batteries and lighting products, while the space also includes food store retailers operating supermarkets, superstores, drugstores and convenience stores.

Let’s take a look at the industry’s three major themes:

  • Demand for most products in this industry remains more or less stable as they include essentials used in daily lives. With the industry being at its mature stage, consumer product players are focused on getting more out of their operations and coming up with unique revenue-boosting initiatives, mainly aimed at keeping pace with changing consumer patterns. While demand for such products fluctuates less, competition from cheaper alternatives is a threat.
  • Buyouts and divestitures have been helping these companies build a better portfolio and increase focus on areas with higher growth potential. Efficient pricing is another tactic to capture market share. Some of these companies are fortifying their position through store expansions and lucrative reward programs.
  • Quite a few players are making efforts to enhance their digital and e-commerce capacities. They are committed toward making digital marketing plans and other investments to augment e-commerce sales. While these endeavors could boost sales, the related costs will keep margin under pressure. Apart from this, higher marketing, advertising and other growth-related investments could put additional pressure on margin. Nevertheless, companies are making efforts to curtail costs.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Consumer Products – Staples Industry is housed within the broader Zacks Consumer Staples Sector. The industry currently carries a Zacks Industry Rank #196, which places it in the bottom 23% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dreary near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since the end of October 2017, the industry’s consensus earnings estimate for the current year has declined by more than 24%.

Despite the bleak near-term prospects, we will present a few stocks that have the potential to outperform the market. But before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Lags on Stock Market Performance

The Zacks Consumer Products – Staples industry has lagged the broader Zacks Consumer Staples Sector as well as the S&P 500 index over the past year.

The industry has lost 13.8% over this period against the S&P 500 index’s rise of 5.2%. Meanwhile, the broader sector has fallen close to 6%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month Price-to-earnings (P/E) ratio, which is commonly used for valuing consumer staples stocks, the industry is currently trading at 15.21X compared with the S&P 500’s 15.72X and the sector’s 18.00X.

Over the last five years, the industry has traded as high as 21.25X, as low as 13.99X, and at the median of 18.28X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

Innovation, product launches and e-commerce enhancements should keep driving sales. Further, restructuring initiatives and cost-containment activities are likely to help companies counter margin woes. Certainly, stiff competition from private players cannot be ignored.

None of the stocks in the Consumer Products – Staples space currently holds a Zacks Rank #1 (Strong Buy). However, we are presenting a stock with a Zacks Rank #2 (Buy), and two stocks with a Zacks Rank #3 (Hold) that are well positioned to capitalize on the opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ollie's Bargain Outlet Holdings, Inc. (OLLI - Free Report) : For this value retailer of brand name merchandise, the consensus EPS estimate for the current fiscal year has remained stable over the last 30 days. This Zacks Rank #2 stock has grown significantly over the past year. The company has an estimated long-term earnings growth rate of 25%. It has an average positive earnings surprise of nearly 9% for the trailing four quarters.

Price and Consensus: OLLI

Newell Brands Inc. (NWL - Free Report) : The consensus EPS estimate for this Zacks Rank #3 company has remained stable over the last 30 days. The global manufacturer and marketer of consumer and commercial products has an estimated long-term earnings growth rate of 4.9%. The company has an average positive earnings surprise of 7.7% for the last four quarters.

Price and Consensus: NWL

Kimberly-Clark Corporation (KMB - Free Report) : The Zacks Consensus Estimate for this Dallas, Texas-based company’s current year EPS has gone up in the last seven days. The company has an estimated long-term earnings growth rate of 6.2%. The Zacks Rank #3 company has an average positive earnings surprise of 1.9% for the trailing four quarters.

Price and Consensus: KMB

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