P&G, household-products shares see haven appeal dimmed by lofty valuations

[NEW YORK] Sky-high valuations for Procter & Gamble (P&G) and other household-goods makers are deterring some investors from loading up on these classic defensive plays even as soaring inflation and the prospect of Federal Reserve rate hikes rattle stocks.

The S&P 500 Household Products Index has outperformed the broader market amid stocks' rocky start to 2022, and also for the past 6 months.

It has climbed about 11 per cent in that period versus a roughly 3 per cent gain in the broader index, including dividends.

The downside to that superior record, however, is that shares of household-products companies are trading around the priciest level since 2000 based on projected earnings, at valuations that are on a par with high-flying tech shares.

So even for investors like David Bahnsen at The Bahnsen Group, who favours the companies for their stable consumer demand and history of lifting dividends to compete with rising interest rates, it is not the time to pile in.

P&G is the firm's biggest position in the industry, and it also holds Kimberly-Clark Corp and Clorox.

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"The main benefit to investors is on the defensive side - there's a reasonably steady growth rate that can be counted on," said Bahnsen, whose firm oversees US$3.4 billion.

But his analysis of P&G, for example, shows its price-to-earnings valuation is not cheap. "So we're not increasing our weighting to the stock," he said.

Bahnsen is not alone in his mixed view of household-products producers. Of the 5 companies in the S&P 500 industry index, P&G has the most bullish consensus rating, but still fewer than half of the analysts tracked by Bloomberg recommend buying shares. The stock has 12 buy ratings, 12 holds and 2 sells.

The primary deterrent to loading up is valuation. The S&P 500 Household Products Index is trading at about 25 times earnings estimates for the next year. That is in line with the valuation of the Nasdaq 100 after the tech-heavy index slumped in January.

Consumer Key

There's also the overarching question of how consumers react to rising prices at a time when inflation is the highest in decades as a result of supply-chain issues and pandemic-driven demand.

Investors have to assess whether shoppers will opt for cheaper alternatives to certain name brands, or simply buy less. The other key issue is whether companies will be able to continue to pass on rising costs to consumers.

"The market seems to be willing to look past the cost pressures of the next few quarters in this group - a combination of seeing some element as being transitory and also that pricing will ultimately cover the inflation as we exit 2022," said Lauren Lieberman, an analyst at Barclays.

Her only buy-equivalent rating for the industry is P&G, the maker of Tide detergent and Charmin toilet paper.

Clorox, the maker of bleach and disinfecting wipes, drove home the sector's cost concerns in its earnings report Thursday (Feb 3). Shares sank 14 per cent Friday to the lowest since 2018 after the company said commodity, manufacturing and logistics expenses will take a bigger bite out of profits than previously anticipated.

Credit Suisse Group AG analyst Kaumil Gajrawala said the latest earnings season has shown that consumer demand has generally held up even as companies raised prices. But with producers including P&G and Kimberly-Clark planning to increase prices further, there is a risk that consumers may opt for cheaper products, he said.

"We are only at the very beginning of seeing pressure from the consumer," he said. BLOOMBERG