Will the Recovery Continue in the Consumer Staples Space?
The consumer staple sector had a tough ride in 2014. While the year began with a prolonged and severe winter, increasing food costs, a weak consumer spending environment and currency headwinds continued to add to the industry’s woes through the year. The decline in consumer spending power was due to concerns over higher gas prices, delayed income tax refunds and higher payroll taxes.
However, things began to improve in the second half of the year on the back of a moderate economic recovery, better job prospects, improved business and renewed optimism as a result of the housing recovery. Rising wages and cheaper fuel were the other positives. With oil and natural gas prices subsiding, consumers are left with more disposable income. Commodity costs have in many cases stabilized, with some at five year lows. Consumers are also expecting lower inflation primarily due to lower gas prices.
Not surprisingly, consumer staple stocks are now performing well compared with the S&P 500 as a whole. Overall U.S. retail sales including all sectors showed a positive trend from October. In fact, the rebound can be seen in the last reported quarter results of most of the stocks in the consumer staples sector. Industry players like Tyson Foods (NYSE:TSN), Sysco (NYSE:SYY) , United Natural Foods, (NASDAQ:UNFI) and Supervalu (NYSE:SVU) have delivered improved performances on the back of a recovering economic scenario.
However, there are some companies like The Procter & Gamble (NYSE:PG) , Mondelez International,(NASDAQ:MDLZ) and Kellogg (NYSE:K), which are still grappling with challenging operating environment. These companies have been posting sluggish results due to lackluster top-line growth and lower unit volumes. The recent weakening of many emerging market currencies against the U.S. dollar has also pulled back revenues significantly for these giants as they generate a significant portion of their businesses from international markets. Hopefully, the year 2015 will prove to be better for these companies with a strong rebound in earnings.
Zacks Industry Rank
Consumer Staples is one the 16 broad Zacks sectors within the Zacks Industry classification. We rank all 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
As a guideline, the outlook for industries in the top 1/3rd of all Industry Ranks or a Zacks Industry Rank of #88 and lower is 'Positive,' the middle 1/3rd or industries with Zacks Industry Rank between #89 and #176 is 'Neutral' and the bottom 1/3rd 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, Publishing – Newspapers, Soaps & Cleaning Preparations, Textile – Apparel and Tobacco.
While none of the sub-sectors are placed in the top 1/3rd of the 260+ industry groups, a number of them fall in the middle portion of that group, with Agricultural Operations industry holding a Zacks Industry Rank #95. It is followed by Consumer Products – Miscellaneous Staples and Textile – Apparel sharing a common Zacks Industry Rank #120. Other sub-sectors such as Food – Miscellaneous/Diversified, Beverages – Alcohol and Publishing – Newspapers are also featured in the middle 1/3rd portion with Zacks Industry Rank #166, #167 and #173, respectively.
The remaining sub-sectors, Beverages – Soft, Cosmetics & Toiletries, Soaps & Cleaning Preparations and Tobacco are featured in the bottom one-third with a respective Zacks Industry Rank of #177, #185, #189, and #191.
Looking at the exact position of these industries, one could say that the general outlook for the consumer staples space is neutral. Results of most of the companies have improved towards the end of 2014 owing to a gradual recovery in the economic environment. However, there are a few that are struggling and will take time to recover.
Earnings Trends
The fourth quarter earnings turned out to be a mixed bag for consumer staples stocks. While on the one hand it was characterized by a gradual economic recovery and lower fuel prices which helped the companies recover from the sluggishness; on the other hand, the companies faced significant foreign currency headwinds.
Of the 44.1% companies in the consumer staples sector that have already reported fourth quarter, the earnings "beat ratio" was 66.7% while the revenue "beat ratio" was only 33.3%.
On a year-over-year basis, total earnings for this sector are expected to decline 2.1% in the fourth quarter compared with 4.2% growth registered in the third quarter of 2014. Total revenue is expected to decline 9.5% in the fourth quarter against a decline of 0.4% in the previous quarter.
Annual earnings are expected to increase marginally by 0.3%, while revenues are expected to decline 7.5%.
The sector is expected to contribute 6.6% of the total S&P 500 income for 2014, less than its 7.5% market cap weight in the index at present. This signals that companies would take time to overcome the difficult consumer spending environment.