We are hosting our weekly Consumables Show today.
EVENT DETAILS:Date & Time: Monday, October 9, at 12 PM ET. Webcast & Slides: CLICK HERE (refresh shortly before the call). |
Every Monday at 12 PM ET our Consumables Team will be hosting a live event where we will go through Timely and Topical events/data that have occurred in our respective industries, as well as preview the week to come. We hope that you can grab your lunch and join us as we break down the Restaurant, Consumer Staples, and Cannabis space.
We will explore a number of topics including recent position monitor changes, top questions from client meetings, most frequent inbounds, pushback on our most recent calls, and updates on some of our best ideas.
Position Monitor Changes (GIS, UTZ, WEST, BRCC, KLG, KVUE)
With our Macro Team’s Quad Outlook we are making some changes to our position monitor to reflect the more difficult environment for consumer staples stocks. The combination of higher interest rates, accelerating inflation, and slowing growth is a framework that has led to underperformance for the sector historically.
Consumer staples companies are divided between relying on price increases taken in the 1H of the year and companies that are introducing new price increases in the 2H to offset inflationary input pressure. Whether or not there are new price increases the entire sector has decelerating price increases in the 2H. The market’s concerns include dividend yields that are less attractive in a higher rate environment, reaccelerating cost pressures, future margin contraction, and the potential of secular disruption from GLP-1 drugs. A recent high profile report projected GLP-1 penetration to be 12% over a long term duration reducing patient’s calorie consumption by up to 20%. A 2.4% volume headwind over a decade is not an existential threat, but the drugs’ penetration has yet to peak.
Our favored names include companies introducing new price increases in the 2H, companies with inflecting/improving unit volumes, secular growth drivers, and upside to consensus estimates. The headline risk of GLP-1 drugs appears to be casting a long shadow over the sector with outsized growth rates and discussions around increased coverage. As slowing consumer spending and tighter household budget concerns rise, consumer staples companies have the potential to demonstrate pricing power and margin visibility once again. We suspect M&A will pick up in the sector with valuations coming down and organic growth more difficult to generate. Our motivation to reduce the number of companies on our long list after share price declines is to put greater emphasis on our favorite names rather than “closing the barn door once the horses have escaped.” Many of the companies moving to our long bias list have better risk/rewards over a medium-term duration with the stock price declines well ahead of the earnings risk in our opinion.
Flu season begins (PRGO, KVUE, HLN)
As our flu season begins, Australia’s is coming to an end. Australia had seen an early start to its flu season before falling below the five-year average in the last two months, as seen in the chart below.
Health officials look to Australia and other countries in the Southern Hemisphere to help predict what our flu season in the Northern Hemisphere will be like. The virus strains in Australia have shown very high levels of similarity to the vaccines. 55% of U.S. adults reported that they would “definitely” or “probably” get a recommended influenza vaccine in the coming months while 46% plan to receive an updated COVID-19 vaccine according to the Center for Health and Risk Communication at the University of Georgia. The percentage is higher than last year’s estimated flu vaccination rate at 49%.
Last year’s early flu season in Australia was an accurate indicator of what our flu season would be like. We were effectively sold out of some cough/cold medicines last winter. Cough/cold is between 15-20% of Perrigo’s revenues, ~15% of Haleon’s revenues, and one of the larger categories of Kenvue’s largest segment.
Butter going up (KHC)
The spot price of butter hit a new all-time high last week. In the past month the CME spot butter price has surged more than 25%. Driving the higher butter prices is strong demand with domestic consumption through July 8.2% above the prior year. Inventories are 12% below the five year average. The drawdown between July and August was the largest since 2015 for those months. Butter prices typically increase into the holiday season, but this year’s rally is early.
Milk prices have recovered since the lows in July. The rally in butter prices is providing some relief to dairy farmers who have had a difficult year. The USDA’s Farm Service Agency has made payments to cover dairy farmers’ margins for eight consecutive months for a total of $1.2B in support. Butter is an input in a wide variety of prepared meals and it is another ingredient cost pointing towards reaccelerating COGS inflation.
