Expect the dark cloud hanging over consumer-products stocks to linger a while longer.
The second quarter should bring solid earnings, but stagnant sales growth continues to worry investors. With raw-materials costs rising, companies' limited power to raise prices will continue to hamstring these shares in coming months, analysts say.
The bad news is well documented. Sector giant
Procter & Gamble
and soap pusher
have warned of earnings shortfalls, while blade runner
said a weak euro would shave second-quarter sales.
As a result, virtually all of the stocks in the group are sharply off year-ago levels, with Dial trading at barely a third of last July's price, and Procter & Gamble off by more than half this year alone.
Expectations hold the key. "One of the hallmarks of this group has been its consistency, and over the past year and a half it's been everything but that," says William Steele, analyst with Dial underwriter
Banc of America Montgomery
. "The result of that has been multiple compression."
Steele attributes the sector's recent problems in part to overly ambitious forecasts that caused companies like P&G to disappoint the market on numerous occasions. Though P&G's promise to stick to less-optimistic estimates last month came as welcome news, many market watchers
said the company might not be out of the woods yet.
Stagnant sales growth remains a concern, according to
Amy Low Chasen
. She forecasts earnings per share growth of 5.8% for the second quarter, an improvement over the 4.4% average growth reported for the first quarter and the 3.9% for 1999. (Goldman Sachs has underwritten for
and P&G in recent years.)
But Chasen forecasts average sales growth of 4.5% for this quarter, only slightly higher than the 4.1% growth in the first quarter and the 4.4% average sales growth seen last year.
"Overall, sales trends are similar to the prior several quarters, with no improvement in volume trends," Chasen wrote in a recent report. "This is the reason we are not particularly excited about the slight earnings improvement."
The backdrop for many of these companies hasn't been promising. Growth has been sluggish, particularly in the U.S., and rising competition overseas has plagued many companies. Meanwhile, the limited pricing power that many consumer-product manufacturers wield makes it difficult for them to offset the costs of rising raw materials and weak currencies.
"Fuel costs are way up, and some input costs have gone up, and that's putting on a little bit of pressure," says Kevin Grant, analyst with
in Chicago, which owns shares in Dial,
, Gillette and P&G.
Retail consolidation is another big issue for some in the consumer-products group, such as Dial. The troubled soap maker cited retailers' inventory reductions in an earnings revision last month. Major retailers favor products backed by greater promotional and advertising spending, says Grant.
The Longer View
Although the outlook may appear bleak, some in the group are managing to live up to expectations. Goldman Sachs' Chasen expects EPS growth of 10% for
large-cap outfits such as
, Gillette, Clorox, Colgate and P&G, up from an average 6.5% in the first quarter.
And investors with a longer-term horizon say companies such as Procter & Gamble, which have been severely punished by the market this year, can offer value.
"If you're a longer-term investor and you're looking at P&G, it's the cheapest it's been in decades," says one
buy-side analyst whose firm holds P&G. The company's shares currently trade around 55 5/16, near their 52-week low and less than half their January high.
"In a portfolio context, this group plays a role," says the analyst. "Even though there's been near-term volatility, longer term there's still pretty stable demand for these companies' products. People are still going to be brushing their teeth and buying their babies' diapers."
Banc of America's Steele adds that once consumer-products companies start delivering more consistent performance, the investment community will start looking more favorably on them.
"I can almost guarantee that a company that can give you 6% top-line and 12% bottom-line growth will find a place in any diversified portfolio," Steele says.