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On Mar. 4, Standard & Poor's lowered its recommended sector allocation for Consumer Staples from overweight to market weight. We at S&P now see the Consumer Staples sector performing in line with the broader market in 2003, given our reduced outlook for the packaged-food and beverage industries amid sluggish volume trends and cost and margin pressures. The near-term outlooks for the tobacco and retail food segments also remain weak.
Consumer Staples stocks have been a bit weaker than the broad market recently. Year-to-date through Feb. 28, the S&P Consumer Staples index declined 6.4%, while the S&P 500-stock index dropped 4.4%. In 2002, Consumer Staples stocks fell 6%, much better than the market's 23.4% decline.
GOOD VISIBILITY. Though we have moderated our stance on the Consumer Staples sector as a whole, we expect the group to benefit over the next six months to a year from increased interest in dividend-paying stocks and a high degree of balance-sheet transparency. A few industries within the group continue to show above-average earnings visibility and consistency despite rising energy and commodity costs. A weakening dollar could also benefit several multinational outfits that derive major sales from exports, especially within the household-products and personal-care areas.
Given the cost environment and a sluggish economy, we expect Consumer Staples' per-share operating earnings to increase between 6% and 7%, on average, in 2003, vs. our prior expectation of 8% to 9%.
We still like the alcoholic-beverage, household-products, personal-care, and retail-drug areas, given these industries' above-average earnings visibility and consistency. Our favorite names include PepsiCo (PEP
), Dean Foods (DF
), Procter & Gamble (PG
), CVS (CVS
), Alberto Culver (ACV
), Clorox (CLX
), Sysco (SYY
), Anheuser Busch (BUD
), and Constellation Brands (STZ
).
GOING FLAT. One area that's starting to show weakness is nonalcoholic-beverage companies. On Mar. 5, Pepsi Bottling Group (PBG
) lowered its first-quarter earnings outlook because of poor weather on the East Coast in January and February and sluggish sales of soft drinks. Pepsi Bottling, along with other outfits that own their delivery services (known as "direct-store delivery"), also faces rising energy costs.
We at S&P downgraded our ranking on Pepsi Bottling to hold from accumulate and cut earnings forecasts given sluggish volumes, rising costs, and a weak Mexican peso. Shares of Pepsi Bottling skidded 18%, to $18.20, on Mar. 5, while soft-drink makers PepsiCo (PEP
) and Coca-Cola (KO
) also fell in sympathy.
Analyst Joy follows consumer staples stocks for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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