Will the Consumer Staples Recovery Continue?

After a tough ride in 2014, the consumer staple sector had a good start to 2015 on the back of 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. Consumers are also expecting lower inflation primarily due to lower gas prices. A decline in commodity prices may improve profit margins for certain staples companies.

However, the continued appreciation of the U.S. dollar relative to most foreign currencies will be a near-term headwind to the earnings of U.S.- based staples companies with significant international operations. Other risks include potential price wars, a competitive environment, slowdown in international markets (including continued slowdown in China), political turmoil in Russia, sluggishness in Japan and an unfavorable economic environment in Europe.

If we analyze the trend on a year-to-date basis, consumer staple stocks performed well at the beginning of the year compared with the S&P 500 as a whole. However, the current situation is just the opposite as the S&P 500 index is well above the consumer staple stocks index.

Industry players like McCormick & Co, Inc. (MKC - Analyst Report), Energizer Holding, Inc. (ENR - Analyst Report), General Mills, Inc. (GIS - Analyst Report), Molson Coors Brewing Co. (TAP - Analyst Report), Tyson Foods, Inc. (TSN - Analyst Report) have posted positive earnings surprises of 9.4%, 14.5%, 4.5%, 7% and 2.7%, respectively, in their recently reported quarters. On the contrary, Monster Beverage Corporation (MNST - ;Analyst Report) and Sysco Corp. (SYY - Analyst Report) fell short of their respective Zacks Consensus Estimate, mainly due to currency headwinds.

Hopefully, the second half of the year 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 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 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.

Only three of all the sub-sectors are placed in the top 1/3rd of the 260+ industry groups, with Tobacco holding a Zacks Industry Rank #17, Textile – Apparel holding #64 and Soaps & Cleaning Preparations holding the #88 spot. A number of them fall in the middle portion of that group, with Food – Miscellaneous/Diversified industry holding a Zacks Industry Rank #94. It is followed by Cosmetics & Toiletries and Beverages – Soft, holding ranks of #116 and #170, respectively.

The remaining sub-sectors are featured in the bottom one-third. Agricultural Operations and Consumer Products – Miscellaneous Staples share a common industry rank #184, Beverages – Alcohol holds a Zacks Rank #208 and Publishing – Newspapers is at #223.

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 in the first quarter of 2015 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

Nearly all the consumer staple companies have reported their first quarter results, wherein the earnings "beat ratio" was 60.6% while the revenue "beat ratio" was only 42.4%.

On a year-over-year basis, total earnings for this sector are expected to decline 6.3% in the second quarter compared with 1.3% growth registered in the first quarter of 2015. Total revenue is expected to decline 12.4% in the second quarter against a decline of 3.9% in the previous quarter.

Annual 2015 earnings are expected to decline 2.6%, while 2016 earnings are expected to increase 8.5%. Revenues are expected to decline 10.1% in 2015, while it is expected to increase 2.8% in 2016.

The sector is expected to contribute 6.5% of the total S&P 500 income for 2014, less than its 7.2% market cap weight in the index at present. This signals that the companies would take time to overcome the difficult consumer spending environment.

Bottom Line

The first quarter 2015 earnings turned out to be a mixed bag for consumer staples stocks. While on the one hand, it was characterized by a gradual recovery in economic scenario and lower fuel prices, which helped the companies to recover from the sluggishness; on the other hand, the companies faced significant foreign currency headwinds.

The current trend shows that the companies would take time to overcome the difficult consumer spending environment at least til 2015.

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

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