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Consumer Staples Stock Outlook - September 2016

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Will the Recovery in Consumer Staples Stocks Continue?

The consumer staples sector has managed to perform fairly well in the past few months, buoyed by rising consumer confidence and an improving economy.

Consumer Confidence Surges

Consumer confidence – a key determinant of the economy’s health – surged for the second consecutive month in September and is now at its highest level since before the Great Recession, indicating that the economy is on the recovery path. The consumer confidence index, which had increased to 101.8 in August, further improved in September and now stands at 104.1. Additionally, the expectations index improved from 86.1 in August to 87.8. The index surged as consumers expect a positive view of the labor market.

Fed Vice Chairman Stanley Fisher is also optimistic about the state of the economy and stated the labor market was extremely close to full employment levels. Given an improving labor market, we expect consumer spending to improve.  

Buildup of Bullish Data

Housing data released in August was also encouraging, owing to favorable durable goods and industrial production. Though GDP growth of 1.1% registered in the second quarter of 2016 was a tad lower than the initial estimate of 1.2%, but still better than a 0.8% increase recorded in the first quarter. During the second quarter, personal consumption also increased on an annualized basis of 4.4%, higher than the rate of 4.2% estimated earlier.

Well, the above discussion raises optimism, but there are indicators that still cast a doubt over the health of the economy.

Factors Raising Concern

The U.S. factory sector showed contraction in August, highlighting manufacturers’ struggles and a broader drag on the economy from weak business spending and an uncertain global outlook. The U.S. service-sector index also sank to its lowest level in August in more than six years.

Not only that, but the possibility of a Fed rate hike in December is also unnerving investors. While the possibility of a rate hike in September is now behind us, there are increased expectations for a rate hike in December, though the tussle is still on among the Fed members over when to go for a rate hike due to mixed economic indicators.

But currently, the big market mover is the U.S. Presidential election between Hillary Clinton and Donald Trump. A month ago, it looked like Hillary Clinton was leading easily in all the polls. However, recent polling data suggests the race is getting closer and the uncertainty of a winner can make markets jittery.

Though these uncertainties can negatively impact the economy, some indicators also hint that the above-mentioned worries are short-lived and the economic picture may improve in the third quarter.

Moreover, the recent rebound in oil prices, improving labor market, increase in consumer confidence and a gradual improvement in the housing market are signals that the economy is on a recovery mode, and undoubtedly the consumer staple sector presents itself as a lucrative investment hub.  

Zacks Industry Rank

Consumer staples sector is one of the 16 broad Zacks sectors within the Zacks Industry classification. We rank all the 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. To learn more visit: About Zacks Industry Rank.

As a guideline, the outlook for industries in the top one-third of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle one-third or industries with Zacks Industry Rank between #89 and #176 is 'Neutral,' and the bottom one-third or Zacks Industry Rank of #177 and higher is 'Negative.'

The consumer staples sector is further sub-divided into the following industries at the expanded level (260 industry groups): Agricultural Operations, Beverages – Alcohol, Beverages – Soft, Consumer Products – Miscellaneous Staples, Cosmetics & Toiletries, Food – Miscellaneous/Diversified, Food – Meat Products, Food – Dairy Products, Food – Confectionary, Publishing – Newspapers, Publishing – Periodicals, Publishing – Books, Funeral Services & Related Business, Soaps & Cleaning Preparations, Textile – Apparel and Tobacco.

Quite a few sub-sectors are placed in the top one-third of the 260+ industry groups. Food – Meat Products and Food – Dairy Products are at Zacks Industry Rank #4 and #5, respectively. While Cosmetics & Toiletries holds a Zacks Industry Rank #24, Beverages – Alcohol holds a Zacks Industry Rank #47 and Agricultural Operations carries a Zacks Industry Rank #49. Consumer Products – Miscellaneous Staples and Soaps & Cleaning Preparations also fall in this category with Zacks Industry Rank of #64 and #76, respectively.

A number of them fall in the middle portion of that group, with Beverages – Soft holding a Zacks Industry Rank #92. It is followed by Food – Confectionary, Publishing – Newspapers, Publishing – Periodicals and Textile – Apparel, holding the same Zacks Industry Rank #103.

Quite a few also fall in the bottom portion of the group. While Food – Miscellaneous/Diversified carries a Zacks Industry Rank #177, Tobacco, Publishing – Books and Funeral Services & Related Business with Zacks Industry Rank #200, #214 and #227, respectively, comes in the bottom one-third.

Looking at the exact position of these industries, one could say that the general outlook for the consumer staples space is positive. Though the economic scenario is still uncertain, it seems most of the sub-sectors of the consumer staples sector have the potential to withstand headwinds owing to improving consumer confidence, strong labor market, and cheaper gasoline prices.

Earnings Trends

The stage is set for the third-quarter earnings season with investor anxiety at its peak on how the quarter will unfold amid mixed economic data. As of now, only 9 S&P 500 members have reported Q3 results, wherein total earnings are up 2.2% from the same period last year on +8% higher revenues. Earnings “beat ratio” is 66.7%, with revenue "beat ratio" of 55.6%.

Out of these 9 consumer staples stocks, General Mills, Inc. (GIS - Free Report) , with a Zacks Rank #3 (Hold), reported first-quarter fiscal 2017 results on Sep 21. The company’s earnings beat the Zacks Consensus Estimate by 2.6% but sales were in line. McCormick & Company, Inc. (MKC - Free Report) is scheduled to report results on Sep 30, before the bell. The stock holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Total Q3 earnings for the consumer staples sector are currently expected to be up 1.7% compared to 1.4% growth in Q2. Revenues are expected to be up 1.7% for Q3, against a 1.1% decline reported in Q2.

For the S&P 500 index, earnings are currently expected to be down -3.1% from the same period last year on +1% higher revenues. In fact, the trend anticipates meaningful growth to resume from Q4, which is then expected to continue into 2017.

For more details about earnings for this sector and others, please read our ‘Earnings Trends’ report.

Bottom Line

Given the performance of the consumer staples sector in the last quarter, things are looking up at the moment. The positive growth trend is expected to continue going forward, owing to eased consumer spending and a strong job market.

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