3 Profitable Consumer Goods Stocks Soaring Past Shaky Consumer Confidence

Mary Lynn Cesar, Kapitall: Can consumer goods stocks survive a dip in consumer confidence? Consider the list below.

Tuesday saw the release of two major consumer economic indicators, painting an interesting picture of the US economy.

The Department of Commerce’s September Advance Monthly Sales for Retail and Food Service figures (PDF) showed $379.5 billion in retail sales last month, which is 0.2% lower than August’s numbers but 3.1% higher than those reported in September 2012. 

Read more from Kapitall on this topic: 4 Consumer Goods Stocks Looking Strong as Confidence Slips

Sales increased in most business categories, with grocery stores posting the biggest gain at 1.0%. On the other hand, auto dealers, clothing retailers, and department stores all experienced declines in purchases, with auto dealers leading the group with a 2.4% drop.

Click on the interactive chart to see analyst ratings over time for the stocks in our list:

A bleaker indicator turned out to be the Conference Board’s October Consumer Confidence survey, providing the index’s weakest reading in six months. Consumer confidence fell to 71.2 in October, down from September’s 80.2 reading in the index’s biggest tumble since August 2011.

Read more about consumer confidence: 4 Consumer Goods Stocks Looking Strong as Confidence Slips

The Conference Board attributed the downward shift to the government shutdown and debt ceiling debacle, stating that wavering consumer confidence will remain an issue in the near future due to the temporary debt ceiling fix.

Under the current law, the debt ceiling is suspended until February 7, allowing the Treasury Department to issue as much debt as necessary until then. After that, the ceiling will be reinstated and Congress will once face a debt ceiling debate.

Investment ideas

The Conference Board expects consumer confidence to be volatile over the coming months due to the short-term nature of the debt ceiling deal. Given the relationship between an inefficient Congress and consumer confidence, we decided to look for investment opportunities among consumer goods stocks, specifically looking for companies with strong indicators of financial health and efficient management.

To begin, we screened stocks in the consumer goods sector for  rising gross profit margins year-over-year for the last three years. Gross margin is the percentage of profit a company makes for each dollar it generates in sales, after deducting production expenses. Examples of these expenses include operating costs, payroll, and taxes.

Gross Margin = Gross Profit / Revenue

The higher the percentage, the greater the gross profits a company takes from its revenue. When a company has rising gross margins, it indicates that the firm is in control of its costs.

We further narrowed down our group by screening for stocks with return on assets (ROA) higher than the industry average. ROA is a performance metric that assesses a company's ability to use its assets to generate earnings. 

ROA = Net income / Total Assets

Assets refers to a company’s debt and equity, both of which can be used to finance its operations. When a company has a high ROA, it means that the firm uses its assets efficiently to make investments that earn significant amounts of money.

We were left with three consumer goods stocks on our list.

Click on the interactive chart below to see sales data over time.

Do you have confidence that these consumer goods stocks will continue to increase their gross profit margins? Use this list as a starting point for your own analysis.

1. Select Comfort Corporation ( SCSS): Develops, manufactures, markets, and supports adjustable-firmness beds and other sleep-related accessory products in the United States.

Market cap at $1.02B, most recent closing price at $18.38.

Gross profit margins increased from 61.64% to 62.45% during the first time interval (52 weeks ending 2011-01-01 vs. 52 weeks ending 2010-01-02). For the second time interval, gross margins increased from 62.45% to 63.29% (52 weeks ending 2011-12-31 vs. 52 weeks ending 2011-01-01). And for the final time interval, gross margins increased from 63.29% to 63.8% (52 weeks ending 2012-12-29 vs. 52 weeks ending 2011-12-31).

TTM Return on Assets at 18.3% vs. an industry average at 10.84%.
 

2. Polaris Industries, Inc. ( PII): Designs, engineers, and manufactures off-road vehicles.

Market cap at $9.04B, most recent closing price at $131.50.

Gross profit margins increased from 25.11% to 26.63% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 26.63% to 27.87% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 27.87% to 28.83% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

TTM Return on Assets at 22.27% vs. an industry average at 13.21%.
 

3. Estée Lauder Companies ( EL): Engages in the manufacture, marketing, and sale of skin care, makeup, fragrance, and hair care products worldwide.

Market cap at $27.76B, most recent closing price at $72.84.

Gross profit margins increased from 76.63% to 78.08% during the first time interval (12 months ending 2011-06-30 vs. 12 months ending 2010-06-30). For the second time interval, gross margins increased from 78.08% to 79.47% (12 months ending 2012-06-30 vs. 12 months ending 2011-06-30). And for the final time interval, gross margins increased from 79.47% to 80.11% (12 months ending 2013-06-30 vs. 12 months ending 2012-06-30).

TTM Return on Assets at 14.35% vs. an industry average at 8.41%.
 

 

( List compiled by Mary-Lynn Cesar, a Kapitall Writer. Accounting and gross margin data sourced from Google Finance. Analyst ratings and quarterly sales data sourced from Zacks Investment Research. All other data sourced from Finviz. )

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