7 Consumer Staple Stocks: Robust Energy Ahead?
(Consumer products story updated with analyst commentary, Church & Dwight earnings, new charts)
NEW YORK (TheStreet) -- As the economy continues what appears to be a slow and gradual climb out of a deep rut, and recession fears begin to gradually fade, defensive names, many of them consumer product names, would likely lose some of their appeal.
For some, they almost begin to feel too stable, and these investors would likely begin seeking out stocks with more growth potential in a stronger economy. Yet for others, consumer products stocks continue to offer comfort and security amid talk of a double dip recession.
Indeed, the unique and most powerful traits of the consumer staples sector are hard to ignore.
S&P Equity Research Services' equity strategist Alec Young said although he typically emphasizes cyclical sectors, his main exception to this view is the consumer staples sector, which he's given an overweight recommendation. "It's a departure from our other sectors," he pointed out.
The reasons for his overweight recommendation include this defensive sector's dividends and global, emerging markets footprint, and its benefiting from the weak dollar. The consumer staples sector, Young said, has an "attractive" 3% dividend yield vs. the market's 2% dividend yield.
Most of the big gains from the dollar weakness would most likely be reinvested, BMO analyst Connie Maneaty suggested in an equity report.
The upside scenario for the consumer staples sector involves an acceleration in consumer spending, trade restocking, M&A, category growth expansion and private label slowdown -- amid an improved macro picture, according to Deutsche Bank analyst Marc Greenberg. "Downside risks include price discounting, private label resilience, emerging markets geopolitical challenges and modern trade development, high unemployment, tepid disposable income growth," he said in a client note.
Are you bullish or bearish on the consumer staples sector? Read on for 7 consumer staple stocks, their latest quarterly earnings scorecards vs. their earnings previews, and what Wall Street thinks is in store for them as you continue to assess your holdings in this sector ...
Clorox (CLX) - Get Report, Ahead of the Earnings:
Comments From John Faucher, J.P. Morgan:
"Overweight. In the calendar year second quarter 2010 Clorox's balance sheet performance was mixed, while cash flow performance was strong. The company's cash conversion cycle remained flat year-on-year at 31 days. Inventory days increased slightly to 44 days, while accounts receivable days increased by 3 days to 36. The company's accounts payable days increased to roughly 49 days from 45 days. Operating cash flow in the quarter increased by 19% year-on-year to $376 million."
"In the calendar year second quarter, Clorox returned a total of $221 million to shareholders entirely through dividend payments (43% of available cash), up from $64 million in dividends last year (35% of available cash). On an LTM basis, CLX returned $276 million to shareholders, above the $248 million returned in the year-ago period. We expect CLX to return cash to shareholders post the Armor-All deal."
Comments From Douglas Lane, Jefferies:
"Our fiscal year 2011 estimate remains $4.50, at the lower end of management's $4.50 to $4.65 range. Top-line pressures are mounting so we reduced sales, but with good expense controls we modestly ticked up operating margins to offset; still look for gross margins below the company given current cost pressures and price deflation."
Reports (Fiscal Year First Quarter):
Nov. 2, before the market open
Consensus Estimate:
Earnings of $1.14 a share on sales of $1.38 billion. During the same period last year, the company reported earnings of $1.11 on sales of $1.4 billion.
Actual Earnings:
Clorox lowered its full-year guidance amid disappointing first-quarter earnings and revenue results.
Clorox lowered its full-year earnings outlook from continuing operations to $4.05 to $4.20 a share from a previously-expected $4.50 to $4.65 a share. "Management reduced fiscal year 2011 ongoing EPS from $4.50 to $4.65 to $4.05 to $4.20 to reflect the auto care divestiture and a lower operating outlook," Jefferies analyst Douglas Lane noted in an equity research report.
Sales growth was reduced to 0% to 2% from a prior sales growth projection of 2% to 4%.
The company reported first-quarter net earnings from continuing operations of $140 million, or 98 cents a share vs. $140 million, or 99 cents a share, in the year-ago quarter. Analysts on average predicted earnings of $1.14 a share.
Including discontinued operations, net earnings were $216 million, or $1.52 a share, compared with $157 million, or $1.11 a share, the same time last year.
The company said that during the quarter volume fell 2%, mainly due to lower shipments of Glad food-storage products and Scoop Away cat litter and difficult year-on-year comparisons given the strong shipments of disinfecting products in the year-ago quarter due to the H1N1 flu pandemic.
Net sales fell 2.8% to $1.3 billion, mainly due to volume softness, the impact of the Venezuela currency devaluation and higher promotional spending, Clorox said. The sales consensus estimate for the quarter was $1.38 billion.
Despite the company's disappointing first-quarter earnings; strong competition; and pain from Venezuela currency devaluation, Morningstar analyst Erin Swanson said she was maintaining her fair value estimate of $68 for the stock. "Our thinking remains intact that Clorox's portfolio of market-leading brands as well as its expanding distribution network should enable the household and personal-care firm to generate solid returns for shareholders over the long term," she explained in a note. "We contend that the market is appropriately accounting for the opportunities and risks in the shares, as Clorox is trading near our fair value estimate."**
Church & Dwight (CHD) - Get Report, Ahead of the Earnings:
Comments From John Faucher, J.P. Morgan:
"Neutral. During second 2010 Church & Dwight's balance-sheet and cash-flow performance worsened year-on-year. The company's cash conversion cycle increased by 14 days year-on-year, as receivable, payable, and inventory trends did not improve year-on-year."
"Cash flow from operations decreased 50% year-on-year to $52 million. Capital expenditures were 1.8% of sales, down from 5.9% of sales a year ago. CHD returned a total of $10 million to shareholders, up from $6 million in the year-ago quarter."
Comments From Jason Gere, RBC:
"While we believe CHD can still do 10% EPS growth in 2011 without an acquisition, we believe for the stock to recover, a sizeable deal would be needed. Management indicated they are seeing more books, aggressively looking at deals and generally expect M&A to pick up in the second half. We would not be surprised to see CHD make an accretive acquisition by the end of the year."
Reports (Third Quarter):
Nov. 9, before the market open
Consensus Estimate:
Earnings per share of 94 cents on net sales of $659.59 million. During the same time last year, the company reported earnings per share of 86 cents on net sales of $646.2 million.
Actual Earnings:
Church & Dwight maintained its full-year earnings forecast of $3.93 to $4 a share after reporting a net income decline.
The company said net income for the quarter fell about 0.7% to $69.5 million or 96 cents a share, from $70 million or 98 cents a share the year before. Earnings per share would rose 12% if a favorable legal settlement of 17 cents a share and a plant restructuring charge of 5 cents a share in 2009 was excluded.
Church & Dwight's net sales for the quarter grew by about 1.7% to $656.9 million from $646.2 million the year before as consumer domestic net sales fell 0.1%, consumer international net sales rose 4.9% and specialty products net sales increased 10.1%.
Analysts, on average, were expecting earnings of 94 cents a share on net sales of $659.59 million.
Church & Dwight's said its credit rating was upgraded in the third quarter.
Morningstar analyst Erin Swanson maintained her $56 fair value estimate for Church & Dwight after the release of the company's third-quarter earnings.
"Although competitive pressures remain intense, we believe a focus on driving down costs and investing in marketing and product innovation will enable the firm to steer through this challenging environment," Swanson said in an analyst note.**
Energizer (ENR) - Get Report, Ahead of the Earnings:
Comments From John Faucher, J.P. Morgan:
"During calendar year second quarter 2010, Energizer's balance sheet and cash flow performance improved. The company's cash conversion cycle decreased by 25 days year-on-year, as the company had year-on-year improvements in receivable, payable, and inventory trends. Energizer's receivable days decreased by four days, while its inventory days decreased by 18 days year-on-year. Payable days increased by 3 days. Energizer's cash flow from operations increased 32% year-on-year to $165 million. In calendar year second quarter 2010, Energizer did not return any cash to shareholders."
Comments From Connie Maneaty, BMO, in a Report:
"FX moves suggest upside of 16 cents; however, given the potential from restructuring and the pending American Safety Razor acquisition, we're sticking with our estimates of $6.55 in fiscal year 2011 and $7.45 in fiscal year 2012."
Reports (Fourth Quarter):
Nov. 2, before the market open
Consensus Estimate:
Earnings per share of 93 cents on revenue of $1.11 billion. During the same time last year, the company posted earnings per share of $1.08 on net sales of $1.0794 billion.
Actual Earnings:
Energizer posted earnings that came in below expectations and warned of higher commodity costs ahead.
The company said it expects its businesses to suffer a negative impact of $20 million to $30 million in fiscal 2011 due to rising commodity and raw material costs, particularly with zinc and steel.
Energizer expects to spend about 11.5% to 12% of net sales in advertising and promotion in fiscal 2011.
"Price wars, tight retailer inventories, share gains from private-label competitors and shifting device trends all serve to make the battery category absolutely brutal," has been the bear's view of Energizer leading up to its most recent earnings report, said Morningstar analyst Lauren DeSanto in an analyst report. "Energizer has been smart to diversify its product portfolio, but we don't anticipate a change in fortunes for the category."
The company posted a fourth-quarter net earnings rise of 129% to $84.8 million, or $1.20 a share, from net earnings of $37.1 million, or 53 cents a share last year. Excluding items, earnings were 81 cents a share vs. the 95 cents that analysts predicted.
Net sales fell by about 2% to $1.06 billion from $1.08 billion because of lower net sales at its household products and personal care segments, which were in part hurt by tough economic conditions in Venezuela. Furthermore, "while sales increased from incremental Schick Hydro shipments, this increase was offset by declines in legacy wet shave products and lower sales of shave preparations due to timing," the company said in a press release.
The fourth-quarter consensus estimate for sales was $1.12 billion.
Procter & Gamble (PG) - Get Report, Ahead of the Earnings:
Comments From Connie Maneaty, BMO:
"The biggest change in our assessment is we now believe that fiscal year 2011 sales growth will be closer to 6% than the 2% on which our prior estimates had been based. The four-point increase is based on a positive FX swing of 3 points, from the down 3% that matched P&G's guidance to 0.2%, and an incremental point of unit growth to 5.5% based on its entry into new categories and market share gains."
Comments From Jason Gere, RBC, in a Report:
"Still some good long-term growth opportunities from developing markets and portfolio expansion. Developing markets and white space expansion are still a solid long-term growth opportunity for PG. PG believes they have right portfolio in place, but will continue to focus on portfolio expansion, including vertical tiering, even when the economy improves.
"Why remain at Sector Perform? Despite feeling more encouraged that PG is headed in the right direction, our pushbacks are 1) better EPS growth is two quarters away, 2) competition may respond to promotion 3) bull thesis is in part based on an economic recovery in developed markets. PG still needs to execute and some macro headwinds may persist."
Comments From Andrew Sawyer, Goldman Sachs:
"We have a negative bias into the quarter. We see flat EPS and potential for a modest sales slowdown as market share gains appear to have moderated ..."
Reports (First Quarter):
Oct. 27, before the market open
Consensus Estimate:
Earnings of 99 cents a share on net sales of $20.25 billion. During the same time last year, the company reported earnings of $1.06 a share on net sales of $19.8 billion.
Actual Earnings:
P&G's first-quarter earnings declined 7% to $3.08 billion, or $1.02 a share, beating its own guidance and the Wall Street consensus estimate.
Analysts polled by Thomson Reuters had forecasted P&G earnings of $1 a share for the quarter.
During the same time last year, P&G had earnings of $3.3 billion, or $1.06 a share. Profit from continuing operations totaled $3.03, or 97 cents a share.
First-quarter net sales increased 2% to $20.1 billion. Analysts predicted sales of $20.24 billion.
The company said organic sales grew 4%, while volume increased 8% "driven by growth in all major geographic regions and five of six business segments."
Looking ahead, P&G said second-quarter earnings from continuing operations should be between $1.05 a share to $1.11 a share. The guidance for lower core earnings is mainly attributable to steeper commodity costs year-over-year and greater marketing expenses.
Net sales in the second quarter are estimated to grow 3% to 5%.
For fiscal 2011, P&G said it sees net sales rising 3% to 5%, and organic sales growing 4% to 6%.
Earnings from continuing operations in fiscal 2011 are forecast to be between $3.91 to $4.01 a share versus the average analyst target of $3.97 a share.
"Procter & Gamble has been battling back from a recessionary slump for several quarters, with stepped-up new product initiatives and spending to defend market shares," Morningstar analyst Lauren DeSanto said in an analyst note. "If first-quarter results, reported Wednesday, are any indication, there is still a tough fight in the ring, but P&G remains well conditioned to take some blows, so our fair value estimate ($77) is unchanged."
Colgate-Palmolive (CL) - Get Report, Ahead of the Earnings:
Comments From Jason Gere, RBC:
"Big question for the stock is whether CL can deliver 10% EPS growth in 2011; possible but dependent on better developed market growth and healthy advertising spending to drive sales. While management didn't say one way or another, we are still hopeful, but cautious, that 10% EPS growth in 2011 can be achieved, but it relies on the sustainability of mid-single-digit organic sales growth (developed market growth needs to come back) and the level of advertising spending."
Comments From Andrew Sawyer, Goldman Sachs:
"We expect cautious initial commentary on 2011 due to competitive pressures. Although investors now broadly expect LSD 2011 EPS growth, we remain on the sidelines as organic sales growth may remain sub-par at 4%."
Reports (Third Quarter):
Oct. 28, before the market open
Consensus Estimate:
Earnings per share of $1.19 on net sales of $4.02 billion. During the year-ago period, the company reported earnings of $1.12 on net sales of $3.988 billion.
Actual Earnings:
Colgate-Palmolive forecasts double-digit earnings per share growth in 2010 after reporting third-quarter earnings that were in line with expectations.
Colgate said the full-year forecast is consistent with its long-term goal.
The company added it expects mid-single digit earnings per share growth for fiscal 2011.
"As we turn to 2011, while our global budget process is still in its initial stages, we are planning to strengthen our volume and market share, driven by many new and existing Colgate products supported by increased advertising, and consequently we anticipate mid-single digit earnings per share growth for the year," said Ian Cook, chairman and CEO, in a statement Thursday.
Colgate said third-quarter net income rose 4.9% to $619 million, or $1.21 a share, in line with consensus expectations, from $590 million, or $1.12, the previous year. The company said it was operating amid aggressive competitive activity and difficult global economic conditions.
Net sales fell 1.4% to $3.94 billion from about $4 billion. The average analyst sales estimate for the quarter was $4.03 billion. During the quarter, global volume grew 3%, pricing was flat from the year-earlier quarter and foreign exchange was negative 4.5%.
The company said its global market share in manual toothbrushes rose 1.6 points to 31.5% from a year earlier.
"While regional sales results were mixed, cost-saving initiatives helped blunt the impact to allow Colgate-Palmolive to deliver healthy earnings per share growth in its third quarter, reported Thursday," Morningstar analyst Lauren DeSanto said in an investor note. "The firm faces a very challenging period, and management is already guiding to slower EPS growth for 2011."
"We don't find this news terribly surprising. Increased competition is forcing Colgate to work harder to defend stronghold market shares in Latin America, while problems in Venezuela related to hyperinflationary accounting following the devaluation of the bolivar continue to be a drag on earnings. We are sticking with our fair value estimate ($92), but we'll probably update our expectations for sales and earnings growth in 2011."
Kimberly-Clark (KMB) - Get Report, Ahead of the Earnings:
Comments From Andrew Sawyer, Goldman Sachs:
"We remain bearish with moderate downside risk to consensus estimates due to still-elevated pulp prices and soft sales in the company's key categories."
Comments From John Faucher, J.P. Morgan:
"Kimberly returned $620 million to shareholders ($275 million in dividend payments and $345 million in share repurchases) during second quarter 2010, up from $254 million last year ($248 million through dividend payments and $6 million in share repurchases). KMB returned 152% of available cash to shareholders in second quarter 2010, versus 31% in the year-ago quarter. In general, KMB has a strong track record of returning cash to shareholders and has returned an average of 129% of total cash available over the past five years."
Reports (Third Quarter):
Oct. 26, before the market open
Consensus Estimate:
Earnings per share of $1.28 on net sales of $4.99 billion. During the same time last year, the company reported earnings of $1.40 on net sales of $4.913 billion.
Actual Earnings Outcome:
Kimberly-Clark lowered its full-year guidance amid soft market demand, high raw material costs and aggressive competition.
For the full-year, Kimberly-Clark lowered its net sales growth forecast to 3% versus previous guidance of 3% to 5% growth. Full-year adjusted earnings per share projections were lowered to a range of $4.60 to $4.70 from the previously-expected range of $4.80 to $5. In July, Kimberly-Clark said it expected EPS to fall at the lower end of the $4.80 to $5 range.
Analysts on average had been expecting earnings of $4.83 a share.
For the third quarter, Kimberly-Clark reported net income decline of 19.4% to $469 million, or $1.14 per share, from $582 million, or $1.40 per share the previous year. Analysts on average had been expecting earnings of $1.28 a share. The decline occurred amid organic sales increase of 1%, helped by a 5% gain in the company's personal care business. However, the company saw volume decline in Kimberly-Clark's K-C Professional business amid challenging economic conditions, as well as volume declines at its Venezuela operations.
Key inputs costs amounted to about $265 million, including $170 million in higher fiber costs and $90 million for raw materials other than fiber.
Net sales in the quarter increased 1.3% to about $4.98 billion from $4.91 billion the previous year. Analysts on average had been predicting sales of $5 billion.
After Kimberly-Clark's earnings release, BMO analyst Connie Maneaty maintained her market perform rating for the stock and said her estimates were under review. "Weakness in end-market demand and competitive activity that is slightly more aggressive than expected temper our outlook for sales growth," she said in a research report. "Higher-than-expected input costs and the need to rein in production to limit inventory growth add more pressure to the earnings outlook."
Meanwhile, J.P. Morgan analyst John Faucher, who holds a neutral view of the stock, said in a client note that a positive aspect of the earnings report was that consumer tissue sales came in better than he expected, growing 1% compared with his negative 2% to3% estimate. For Faucher, the key negative takeaways included organic top line results coming in below his expectations, contraction of gross margin to 32.4% compared with his 34.5% estimate and each division of the company missing his operating profit target, with professional and health care showing the biggest misses.
Newell Rubbermaid (NWL) - Get Report, Ahead of the Earnings:
Comments From Dave Sekera, Morningstar:
"Newell has grown through an active acquisition program and has developed a diverse basket of consumer and commercial products, including well-known brands such as Rubbermaid storage containers, Sharpie and Paper Mate office supplies, Lenox tools and hardware equipment, and Graco baby products, among others. However, many of these acquisitions did not provide the firm with the intended synergies or economic returns. Newell has sold more than 16 of its underperforming brands since 2003, but in our opinion, it continues to operate with a portfolio of lackluster brands that fail to garner much brand equity and pricing power.
"Additionally, Newell's acquisition strategy to drive its growth and expand its portfolio saddled the firm with substantial debt."
On Oct. 20, Newell Rubbermaid's Graco Children's Products' division announced the
recall of 2 million Graco strollers due to risk of strangulation and entrapment.
Reports (Third Quarter):
Oct. 29, before the market open
Consensus Estimate:
Earnings per share of 41 cents on net sales of $1.5 billion. During the year-ago period, the company reported earnings of 38 cents on net sales of $1.45 billion.
Actual Earnings:
Newell Rubbermaid has reaffirmed its full-year guidance of $1.40 to $1.50 a share versus the consensus estimate of $1.50 a share as it reported earnings decline that was largely related to restructuring costs.
Newell Rubbermaid said the earnings will likely be at the high end of the range.
The company said third-quarter net income fell about 67% to $28.3 million, or 9 cents a share in the third quarter, from $85.5 million, or 28 cents a share the previous year. Adjusted earnings were 42 cents a share versus the consensus estimate of 41 cents a share.
Newell Rubbermaid posted 2.6% net sales increase to $1.49 billion in the quarter, from $1.45 billion the previous year. Analysts on average were expecting net sales of $1.5 billion.
The company also said core sales improved 5.7% and gross margin was up 70 basis points from last year.
"In the third quarter, Newell Rubbermaid continued to realize the benefits from its portfolio optimization and restructuring program," Morningstar analyst Dave Sekera said in a research report. "Core sales grew 5.7% after excluding the impact of product line exits, and the gross margin expanded 70 basis points to 38.1%. These results are in line with our full-year expectations and support our thesis that the firm will continue to realize cost efficiencies and improved profitability in the short term."
"However, we remain concerned that with consumer spending remaining weak and raw-material costs increasing, the firm will have a tough time continuing to realize this pace of improvement over our forecast period."
-- Written by Andrea Tse in New York.
>To contact the writer of this article, click here:
Andrea Tse
.
>To follow the writer on Twitter, go to
.
>To submit a news tip, send an email to:
.
RELATED STORIES:
>>7 Auto Suppliers Poised to Accelerate
>>Top 4 Tobacco Stocks: Which Are Poised to Catch Fire?
>> Stroller Recall: Infant Strangulations Prompt Graco Recalls
Copyright 2010 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
