On Earnings Score Card Consumer Staples is Dead Last!

We’re more than halfway through the earnings season for the sector and we thought it was worth flashing our table that ranks the earnings performance of the S&P500’s 9 sectors.  Of note, Consumer Staples (XLP) is ranked dead last across Revenue and EPS performance!

  • XLP Revenue beats = 35%
  • XLP EPS beats = 48%

On Earnings Score Card Consumer Staples is Dead Last! - 2Q14ES BeatMiss

 

While the XLP sector has been preferred for such factors as dividend yield and consolidation potential, we’d expect the top and bottom lines of the remainder of the companies reporting this quarter and in 2H to be challenged on:

  • U.S. Macro Factors – as outlined by our macro team, we continue to expect consumption to suffer as U.S. growth slows and inflation rises, in-line with the team’s quarterly themes of #InflationAccelerating (Q1 2014); #ConsumerSlowing (Q2 2014 ); and #Q3 Slowing (Q3 2014)
  • Less Fat to Cut – staples companies have significantly trimmed costs and improved efficiencies to a great extent over recent years. As top lines slow due to macro and consumer factors, we believe companies will be challenged to grow bottom line results with less fat to trim.  Included, we expect input (commodity costs) to remain elevated.
  • Emerging Market Mixed – once the sector’s great growth engine (China, Brazil, India, Russia) we’re seeing slower growth and higher inflation impact the emerging market.  Despite pockets of improvement, we’re seeing lower margins (versus other geographies) and a weaker consumer impacting results.
  • Europe Slow– though off ‘crisis’ lows, Europe has weakened in mid 2014 (PMIs and confidence figures down). With unemployment rates high and sticky, we think Branded company sales will struggle and price taking will be challenged to make up for volume declines. 
  • Hefty Valuation – while the sector’s valuation (P/E of 18.8x) has come in over recent weeks from a 5 year high (see chart below), we could see investor enthusiasm wane alongside slowing growth across the sector. 

On Earnings Score Card Consumer Staples is Dead Last! - z. cs pe

 

Howard Penney

Managing Director

 

Matt Hedrick

Associate

 

Fred Masotta

Analyst

 


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