Consumer staples stocks have been crushed in the past couple of months.
They are usually pretty safe, but they have recently had a bit of an earnings problem.
The Vanguard Consumer Staples Index Fund (VDC) has dropped 12% since hitting an all-time high April 20. That decline is about the same as the
in that span.
That is a sudden change of tune, as staples stocks had been up for the year by April 20, while the broader market was down.
That was because large market capitalization staples stocks are seen as safe. Their sales and earnings usually remain fairly stable even when the Federal Reserve lifts interest rates to cool down economic demand and inflation.
But macroeconomic forces that are specific to today’s environment are putting a dent into analyst’s earnings expectations for the sector.
These companies must confront higher costs, with the price of raw materials and commodities recently soaring. Many companies can’t immediately fully offset those higher costs with their price increases, so investors reduce their expectations for profit margins.
“Staples continues to be our least preferred defensive sector as it carries margin risk that is now being reflected in relative [earnings] revisions,” writes Mike Wilson,
chief U.S. equity strategist.
Indeed, data show analysts have revised earnings estimates lower for staples.
For the past three months, the aggregate calendar year 2022 earnings per share estimate for the fund has dropped 0.6%, according to FactSet. That is with sales estimates up 2.2%, which means that analysts are revising their operating margin estimates lower as they expect costs to rise faster than sales.
Procter & Gamble
(PG) is a good example. The stock is down 13% since April 20, when it almost reached its all-time high.
In the past three months, analysts have moved their EPS estimates down about 3% for the P&G’s fiscal year 2023, a similar time frame to the 2022 calendar year.
The company said on its most recent earnings call that rising commodity costs are expected to be a “significant headwind” to earnings.
P&G hopes to be able to fully pass those costs along with their price hikes. But for now, analysts expect the company’s operating margin to decline by a few tenths of a percentage point year-over-year for the quarters ended in September and December this year. They forecast the margin to grow back toward prior levels over the next few years.
But taking a step back, it hasn’t just been recently weak profit trends that have dented these staples stocks.
The names are down by more than their earnings estimates are. That means their valuations—the multiple that the market places on near-term earnings expectations—have fallen.
The staples fund now trades at a 21 times forward earnings multiple, down from a multiple in the mid-20s earlier in the year.
Multiples in the staples group have fallen from a “high starting point,” said Dan Eye, chief investment officer at Fort Pitt Capital Group.
That is all part of a broader market selloff that is bringing valuations across sectors lower. Profit margins and earnings are certainly one concern helping bring valuations lower for the entire market.
So maybe these consumer staples stocks are a buy now. With inflation sticking around, staples companies might have the opportunity to lift prices enough to keep their margins in shape beyond the next few quarters.
Corrections & Amplifications
Dan Eye is chief investment officer at Fort Pitt Capital Group. An earlier version of this story incorrectly gave Eye’s first name as Dane.
Write to Jacob Sonenshine at [email protected]