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Consumer Products Industry Outlook: Will Cost Woes Linger?

Vrishali Bagree

The Zacks Consumer Products – Staples industry includes companies involved in marketing, producing and distributing a wide range of consumer products. These include personal care items, cleaning equipment, stationery, bed and bath products and household goods like kitchen appliances, cutlery and food storage. Some of the industry participants provide batteries and lighting products, while the space includes food store retailers operating superstores, convenience stores, supermarkets and drugstores.

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

  • As the industry participants mainly provide essentials used in daily lives, demand for most of the products remains fairly stable. Thus, consumer product players are focused on concerted revenue-boosting initiatives to squeeze out more from their operations. While demand is relatively stable, competition posed by cheaper alternatives is a concern.
     
  • Industry players are focused on optimizing portfolio through buyouts and divestitures, which enable them to increase focus on areas with higher growth potential.  Also, innovation in areas that are witnessing increasing consumer interest such as organic products is adding to portfolio strength. Companies are also adopting prudent pricing strategies to gain market traction and battle input cost challenges.
     
  • Several players are enhancing their digital and e-commerce capacities to keep pace with evolving consumer patterns. While these endeavors act as major tailwinds, the related costs keep margins under pressure. Also, higher advertising and other growth-related investments are threat to margins. Nevertheless, solid cost-containment and restructuring plans by companies should offer some respite.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Consumer Products – Staples industry is housed within the broader Zacks Consumer Staples sector. It currently carries a Zacks Industry Rank #185, which places it in the bottom 27% 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 murky 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.

Despite the drab 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 S&P 500 index as well as the broader Zacks Consumer Staples sector over the past year.

The industry has lost 15.5% over this period against the S&P 500 index’s rise of 15.8%. Meanwhile, the broader sector has gained 8.9%.

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 20.84X compared with the S&P 500’s 18.1X and the sector’s 19.23X.

Over the last five years, the industry has traded as high as 21.93X, as low as 13.74X, and at the median of 17.97X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)


 
Bottom Line

Portfolio optimization, innovation and e-commerce developments are likely to augment sales. Also, companies in the space are likely to tide over cost related hurdles with stringent saving measures, restructuring plans and efficient pricing.  Stiff competition from private players cannot be ignored.

All said, we are presenting a few stocks from the Consumer Products – Staples space that are well positioned to capitalize on the opportunities.

Kimberly-Clark Corporation (KMB): The Zacks Consensus Estimate for this Dallas, Texas-based company’s current-year EPS has remained stable last 30 days. The company has an estimated long-term earnings growth rate of 5.5%. The Zacks Rank #2 (Buy) company has seen its shares rise as much as 22% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: KMB



Newell Brands Inc. (NWL): The Zacks Consensus Estimate for this New Jersey-based company’s current-year EPS has gone up 3.1% in the last 30 days. The Zacks Rank #2 company has an estimated long-term earnings growth rate of 6%. Notably, Newell Brands has seen its shares gain 14.6% in the past year.

Price and Consensus: NWL



International Flavors & Fragrances Inc. (IFF): This Zacks Rank #3 (Hold) company has seen its shares rise 6.6% in the past six months.

Price and Consensus: IFF



Energizer Holdings, Inc. (ENR): This Zacks Rank #3 company has an estimated long-term earnings growth rate of 7.5%. Further, the stock has rallied 13.1% in the past year.

Price and Consensus: ENR



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