HPPC Round-up Ahead of Earnings

The HPPC earnings season kicks off next week with Kimberly Clark reporting on 10/22 before the market open. Below, we offer a recap of recent trends in sentiment and valuation for the sector as well as a reiteration of our favorite names on the long and short sides.

 

Current Ideas

ENR (short side): The Company’s exposure to unfavorable categories and lack of exposure to growing categories is a concern for us as is the macro outlook. Over the past ten years, organic sales growth has been anemic as acquisitions have been the primary driver of top-line growth. Per our recent notes, we believe ENR is still a short.  

HPPC Round-up Ahead of Earnings - ENR organic growth

HPPC Round-up Ahead of Earnings - enr snapshot

KMB (short side): Of all the companies we follow, KMB carries the greatest risk of a guide-down in 2H13 after management reiterated its FY EPS guidance range on 2Q results that were disappointing due to weak sales and FX headwinds.

A difficult competitive and operating environment is pressuring volume growth and margins at KMB as input costs accelerate even as pricing growth in the U.S. remains flat-to-down. The company has underperformed the S&P 500 since we suggested shorting the stock as a pair versus long EL (see note). We expect investor sentiment to turn when organic sales growth inflects although recent strength in the stock suggests that some positive news is expected in next Tuesday’s press release.

 

EL (long side): Estée Lauder has been our favorite name on the long side since 8/27.

EL has performed less-well over the past week-to-ten days versus the prior two months but we remain positive on the company’s prospects as a high-double digit earnings growth rate is supported by mid-to-high single digit revenue growth and exposure to the high-end consumer.

With the stock up 5% since 4QFY13 EPS on 8/15, investors will need to see impressive figures for the stock to maintain momentum. We have confidence in the long-term benefits of SMI, particularly cost savings which, unlike where ENR and KMB are concerned, we expect investors to pay up for as strong sales growth enhances the impact of efficiency gains.

 

CL (long side): Colgate Palmolive is another stock we have a favorable view of ahead of earnings (last quarter’s recap note). The company’s strength in the growing oral care category and resilience in emerging markets have been strong positives for the company. We expect continuing EBIT margin expansion when the company reports 3Q13 results before the market open on 10/24.

The company was prudent in lowering its FY EPS guidance based on FX headwinds when releasing 2Q EPS and we expect the stock to outperform over the remainder of the year.

 

Sentiment

From a sentiment perspective, CLX (downgraded this morning to Underweight from Equalweight at Morgan Stanley) is the least liked stock in the sector. Generally, the most liked names in the sector have seen a retracement in sentiment (NWL, PG, EL, REV).

ENR has been a standout in that it is middle-of-the-pack in terms of sentiment (below) but the most recent two week period saw sharp decline in sentiment as one sell-side downgrade and an uptick in short interest pressured the stock.

Per our comments, above, we remain bearish on the name. We include a sentiment table encompassing all of staples, for reference.

HPPC Round-up Ahead of Earnings - HPPC sentiment scorecard 10.17.13

HPPC Round-up Ahead of Earnings - Staples sentiment scorecard 10.17

Price Action & Valuation

As we can see in the table below, recently there has been plenty of variance in the price action of the sector, independent of categories/geographical exposure. Note that the starting points for the respective companies’ price and multiple changes vary depending on the date of each company’s most recent earnings release. KMB was the first of these companies to report 2QCY13 earnings, on 7/22, with COTY the latest on 9/17. Please see the table to the right of the chart for reference.

HPPC Round-up Ahead of Earnings - cpg multiple and stock turn since earnings 1

HPPC Round-up Ahead of Earnings - hppc pe multiples

Rory Green

Senior Analyst