Flash Call - Update to our 1H Themes
We are hosting a flash update call to our 1H Consumer Staples Themes on Friday at 12:30 PM ET.
We are staying Long Consumer Staples. Hedgeye’s Macro team is calling for Quad 4 in Q2. Growth slowing remains the defining macro dynamic for 2022. Recent world events have introduced a new regime of inflation volatility. Food prices have hit a 40-year high. The average gasoline price in the U.S. has set a new record high. For Consumer Staples, we are seeing a high level of pervasive inflation. In the past two weeks, Consumer Staples stocks (historically the best performers in Quad 4) have reacted to Q1 shifting to Quad 3. Recent events have not changed our expectations for Quad 4 in Q2.
We still see an inflection in margins ahead for the Consumer Staples sector. The inflationary dynamic for the Consumer Staples sector remains intact and has likely been distorted to the upside by recent fat-tailed world events. Economic sanctions on one of the world’s top three oil exporters have led to a surge in oil prices. Oil price shocks or run-ups have preceded 11 of the last 12 recessions since WWII. Russia and Ukraine account for a quarter of the world’s wheat production. The causes of the inflationary pressures will likely prove sticky, notwithstanding the rate of change dynamics. Initial conditions do matter. A 1% change from 8% or 2% is not the same. While we see a rate of change in inflation, the absolute level will remain high. We emphasize companies with pricing power.
We will update many of our Themes Deck slides, review notable Q4 earnings results, focus on the Quad for Q2, and make adjustments to our position monitor, emphasizing the margin inflection and pricing power in the sector.
Mild flu season (PRGO)
During the 9th week of the year, 1.6% of patient visits reported through ILINet were due to respiratory illness that included fever plus a cough or sore throat. 1.6% is below the baseline despite multiple respiratory viruses that are co-circulating. There is an increasing trend in the percentage of outpatient visits for respiratory illness in one age group, 5 to 24 years old. This flu season is higher than last year’s nearly non-existent season, but it is well below every year since 2015-6. This year’s flu season would be a disappointment any other year except compared against the pandemic. It pushes out the cough & cold upside to next year for PRGO.
Food prices at a new all-time high globally (NOMD)
The FAO Food Price Index is a measure of the monthly change in international prices of a basket of food commodities. The index averaged 140.7 points in February, up 5.3 points or 3.9% from January and 20.7% higher than the prior year. February represents a new all-time high, exceeding February 2011. The rise in February was led by large increases in vegetable oil and dairy prices. Palm oil prices have been rising due to reduced export supplies from Indonesia, the largest exporter. Soybean prices have increased due to a weaker outlook for production in Brazil. Sunflower oil prices have risen due to concerns over disruptions from Ukraine, the largest producer.
Chobani puts off IPO
Given the volatility in the markets, it is no surprise that Chobani has delayed its plans to go public. Chobani had previously planned its IPO in the fall of 2021 and then January of 2022 targeting a valuation between $7-10B. The surprise was the news of the Chief Operating Officer, Chief People Officer, Chief Corporate Affairs Officer, and Chief Strategy Officer all leaving Chobani. The WSJ reported that the departures are related to the delay of the IPO to the 2H of 2022 or 2023. Chobani's Greek yogurt was a disruptive share gainer in the yogurt aisle for years until competitive offerings and new style yogurts stalled Chobani's share gains. Growth accelerated in recent years with new product offerings including oat milk, creamers, cold-brew coffee, and other plant-based products. Delaying the IPO was the right call, but the market made it for Chobani. The mass departures appear to be related. It's also likely that there is more to the reasons than just the delay of the IPO for better market conditions.
