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HIGH PRICE FOR GROWTH
- Consumer staples stocks, which include Procter & Gamble PG.N and Anheuser-Busch InBev ABI.BR , have been trading at historically high multiples, anywhere from 18 times earnings to more than 30 times, buoyed by the fact that they are stable, have decent yields in a low interest rate environment and exposure to emerging markets, which up until recently, were significant offsets to weak mature markets.
- Even though they have tempered their forecasts in the wake of the downturn, they are still seeing top- and bottom-line growth, and many investors are prepared to pay up for that, especially with so many other sectors sinking.
"They (investors) are saying 'Look the world is terrible, I'm going to lose money in most places. I'm prepared to pay a high price to be confident for a little bit of growth'," said Ali
- Miremadi, fund manager at THS Partners in London which owns shares of Unilever, Nestle, Pepsi and Mondelez International MDLZ.O .
"These are all fundamentally strong companies, which assuming you are going to hold them for a reasonably long period of time, are very reasonably valued." Still, valuations do reach a point -- somewhere around 30 times earnings -- where it's harder to justify owning a stock that is delivering only single-digit revenue growth, Miremadisaid.
- Consumer staples do nevertheless offer income, which may become more scarce as companies such as miner Rio Tinto
- But companies need to work harder to win over consumers, according to PepsiCo Chief Executive Indra Nooyi. "In the past, we used to say when gas prices came down there used to be a perceptible increase in convenience store traffic," Nooyi told analysts this week.
"Yes, we did see an increase in convenience store traffic (of about 6 percent), but I think that game has played out. Now it's going to be how much innovation you put on the shelves and how you execute." L'Oreal Chief Executive Jean-Paul Agon said he was surprised by the lack of any fuel-related benefit.
"When I ran L'Oreal US ten years ago, every 10 cent, or 20 cents less in the price of the gas translated immediately into more consumption," Agon said. "We started the year, last year, with the idea that the reduction in the price of gas would probably mean an acceleration of the consumption ... and honestly, we did not see it at all."
"We did not see it in America, we did not see it in Western Europe. So we don't have some precise explanation about it. Maybe some people are doing more savings or spending money on other categories." With global oil consumption around 95 million barrels per day, the drop in prices from $115 per barrel in June 2014 to around $30 now has resulted in savings of about $8 billion per day for oil importers, said Laith Khalef, senior analyst at Hargreaves Lansdown Stockbrokers.
"That's a pretty big stimulus to those oil consumers, but we haven't really seen it yet," Khalef said.
"That's a theme that perhaps is not being played out in the market. Part of the reason the fuel price benefit is more muffled than in previous cycles, analysts say, is because consumers are paying down their own debt, uncertain about their future wage growth. Another reason is that there are more things to spend money on that are not tracked by traditional measures, such as online home-sharing service Airbnb or car ride service Uber.
"The consumer has arguably been swinging his money around, and is not consistently going anywhere," said Liberum analyst Robert Waldschmidt. "This month it's at the retail outlets, next month it's at the cinema and maybe after that it's a new app."