Time to Stock up on Consumer Staples

 | Feb 21, 2014 | 10:00 AM EST  | Comments
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ko

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pg

While the year has started on a very soft note for a number of consumer-staples stocks, we think this has created a good entry point.

The biggest hit to earnings has come from foreign currency translations, especially from the emerging markets. Venezuela has caused the most damage, but the broader markets across Asia, Latin America and EMEA have also weighed on results.

Beyond currency, business has been slow. Global growth has likely slowed to 3% vs. 4% for the consensus expectations, as a result of the recent dislocations in the emerging markets. This should be a shorter-term phenomenon. All of the major CEOs are still talking positively about the long-term opportunities of a rising global middle-class consumer. 

We expect better things ahead. This will not only come from a better environment, but companies are under greater pressure from outside investors to do more for shareholders.

We like these three companies.

PepsiCo (PEP) reported better-than-expected earnings of $1.05 a share vs. $1.01 for the consensus expectations. The stock was weak the day of the announcement due to foreign exchange pressures, a soft North American beverage market and in-line 2014 EPS guidance up 7%.  Investors were looking for upside in 2014's guidance. Nevertheless, management announced a new $1 billion annualized cost reduction program and increased the dividend and share repurchase programs for 2014.

Pepsi is under more pressure to perform since Nelson Peltz acquired a stake in the company over the past year and has been agitating for a major reorganization of the company. Only good things can happen from this pressure. The shares are reasonably priced at 17.2x 2014's EPS estimate of $4.55. The stock has an above-market dividend yield of 3.30%.

Coca-Cola (KO) reported in-line earnings of 46 cents a share. The stock has struggled since the day of the announcement due to very negative foreign exchange trends, as well as subpar volume growth of 1%. Management said foreign exchange pressures will weigh on results all through 2014, but are only transitory. Volumes surprised to the downside at up 1%. Investors have been accustomed to 3% volume growth. North American carbonated drinks were a disappointment. Additionally, emerging-market volumes throughout the world were also soft, including Brazil and China. Management announced a new $1 billion cost-reduction program to be reinvested back into product advertising and promotion to stimulate volume growth.

The CEO of Coke constantly states that his sole desire to exist is to enhance shareholder value, which is what we like to hear from the head of a company.  The shares are reasonably priced at 17.5x 2014's EPS estimate of $2.13. The stock has an above market dividend yield of 3.28%.

Procter & Gamble (PG) negatively preannounced its annual 2014 guidance over the past week. Core EPS growth is now only expected to be 3-5% for 2014 vs. 5-7% for consensus expectations. The negative guidance is entirely due to very difficult foreign-exchange trends. Management reiterated the long-term goals for Procter & Gamble and announced a step up in the productivity programs. On a recent call, the new CEO was determined to move P&G back to an upper-quartile performer vs. a lower-half performer of recent years. This should mean better things for the shareholders. The shares are reasonably priced at 18.6x 2014's EPS estimate of $4.18. The stock has an above-market dividend yield of 3.09%.

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