Overlooked Outperformers: 3 Consumer Staples Stocks Goldman Sachs Missed
On March 1st, Goldman Sachs analyst Bonnie Herzog assumed coverage of several consumer staples stocks. The analyst is particularly fond of three particular companies.
“‘We believe we are returning to an environment that will see private label’s secular rise in the U.S.,’ writes Herzog, noting private label is gaining share within roughly 60% of household product categories,” Barron’s reported Herzog’s comments.
The analyst also said consumer staples companies will benefit from lower inflation and higher gross margins. Herzog’s three favorites are Colgate-Palmolive (NYSE:CL), Church & Dwight (NYSE:CHD), and Kimberly-Clark (NYSE:KMB).
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I like the first two, however I’m not entirely sold on Kimberly-Clark. The trio is an excellent place to start for investors looking for consumer staples stocks that should benefit from a better year ahead. Here are three others you should consider.
Unilever (UL)
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Unilever (NYSE:UL) is a consumer staples company with many warts but an appealing valuation that should pay off for patient investors.
When Hein Schumacher became CEO of Unilever in July 2023, he knew he was taking over a business in flux. The company’s food sales accounted for over a third of its annual revenue of 60 billion euros ($65.61 billion).
Unfortunately, since hitting an all time high of over $64 in Aug. 2019, its shares have lost 22% of their value. As Reuters contributor Aimee Donnellan pointed out in February, its valuation has fallen significantly over the past five years, from a multiple of 15 times EBITDA (earnings before interest, taxes, depreciation and amortization) to just 11 today.
To get back to consistently meeting its internal target of a 20% operating margin, Unilever is now focusing on 30 “power brands” that include Hellmann’s, Dove, Magnum, and Nutrafol. These 30 power brands contributed 75% of Unilever’s revenue while adding to growth and margins in 2023. Over the past year, its operating margin was 16.7%, 60 basis points higher than in 2022, with the power brands delivering 8.6% sales growth year-over-year.
In 2023, the company converted 111% of net income to free cash flow, providing plenty to carry out its new 1.5 billion euro ($1.64 billion) share repurchase program. Long-term value investors should like Unilever below $50.
Hershey (HSY)
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As I mentioned to someone the other day, I’ve always been optimistic about Hershey’s (NYSE:HSY) stock due to its history. For those unfamiliar, the Hershey Trust Company is the trustee for the Milton Hershey School Trust, The M.S. Hershey Foundation and the Hershey Cemetery Perpetual Care Maintenance Trust.
Founded by Milton Hershey himself in 1905, the Hershey Trust Company was established to oversee the Milton Hershey School, which was established in 1909. To gain admission you must come from a low-income family, be between four and 15 at the time of enrollment, have no behavioral issues and be able to benefit from the school’s academic program. More than 11,000 people have graduated from the school.
To pay for all of this, the Hershey Trust Company holds a significant 28% of Hershey’s equity and 79.5% of its voting shares. As a result, it can control the appointment of nine out of 11 directors. This dual-class structure is one that no one should oppose.
Hershey is not a popular stock with analysts. Of the 26 covering its stock, only six rate it a buy, with a $210 target price, 6% higher than its current share price. Down 17% over the past year, every one of Hershey’s valuation metrics are lower today than the five-year average. Yielding 2.8%, it’s an excellent combination of income and capital appreciation.
Lamb Weston Holdings (LW)
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Lamb Weston Holdings (NYSE:LW) is all about potatoes. It is the number one producer of value-added frozen potato products in North America and is available in more than 100 countries. The company sells its products to restaurants and retailers with brands including Grown in Idaho and Alexia.
Lamb Weston was spun off from ConAgra Brands (NYSE:CAG) in Nov. 2016. Its total shareholder return since the spinoff is 221%, 95 percentage points higher than the S&P 500 and nearly four times its S&P Food and Beverage peers.
In 2024, Lamb Weston expects to generate $6.9 billion in revenue at the midpoint of its guidance, with adjusted EBITDA of $1.58 billion, a margin of nearly 23%.
With 27 factories worldwide supplying its customers with the best possible potato products for their customers, Lamb Weston is ideally positioned to benefit from ongoing demand.
Unlike Hershey, analysts are more on board the Lamb Weston story. Of the 14 covering LW, 13 rate it a buy, with a target price of $129, 25% higher than its current share price. Who doesn’t like French fries?
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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