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Consumer companies' outperformance no longer guaranteed by cheap oil
[LONDON] Consumer companies are offering investors a small degree of relief from the turmoil in banking and resources in a results season dominated by fears about slowing economic growth.
But those companies say lower oil prices no longer translate into a traditional boost for spending on their products because households are using the money saved at the gas pump and on energy bills to stash cash, pay off debt or on other items.
This means those companies may not be as much of a safe haven investment as they used to be in times of low commodities prices or economic stress.
Since 2008, food and beverage stocks have offered a 142 per cent total shareholder return, nearly double that of the market overall, according to Thomson Reuters global equity indices. Since the start of the year, they have lost 3.4 per cent, versus 12 per cent for the global index. "In the context of a market that's in meltdown, the performance consumer goods has been delivering is pretty good,"said Jefferies analyst Martin Deboo.
Consumer stalwarts PepsiCo, Unilever and French cosmetics firm L'Oreal all reported better-than-expected revenue in contrast to dismal results from banks including Credit Suisse and Deutsche Bank and oil, gas and mining firms. Tobacco company Philip Morris International gave a strong outlook and liquor giant Diageo reported improvements.
There have also been good results from General Motors , Adidas and Norwegian Air, and analysts are on the lookout for similar trends next week in reports from Nestle, Michelin, Puma and Royal Caribbean Cruises.
Consumer confidence has risen in the United States and Europe, nearing 2007 levels, and car sales, which analysts call a good proxy for discretionary spending, are showing promise of staying healthy in 2016.
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 per cent), 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."
Consumer staples stocks, which include Procter & Gamble and Anheuser-Busch InBev, 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 . "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, Miremadi said.
Consumer staples do nevertheless offer income, which may become more scarce as companies such as miner Rio Tinto scrap their dividend payout policies.
With dividend payout ratios in the 80 to 90 per cent range, tobacco stocks like Philip Morris and British American lead the pack of consumer staples with yields of 4.5 per cent. "Things could be going better, but if people are looking for defensive qualities and income from their equity investments, staples gives you both of those on a fairly reliable basis,"said Morningstar analyst Philip Gorham.