Consumer Staple Stocks Still Taste Good, But There Could Be Pressure Coming

Includes: AXSL, CPB, DLM, IPS, KHC
by: Soos Global Capital

By Ed Leventhal

In a post last week called "Deflation...Really???", which dealt primarily with regard to the food sector, I noted that we'd get further insight on the issue this week as HJ Heinz (HNZ), Del Monte (DLM) and Campbell (NYSE:CPB) report earnings.

With Campbell's reporting on Friday likely to be overshadowed by the NFP data coming that day at 8:30am, and HJ Heinz and Del Monte having already reported, we expect a bit of additional color on the issue of whether commodity price increases that we've seen ytd in wheat and other agriculture products are having a margin dent effect on these companies.

The early read is "not really." In the case of Heinz, very strong sales in Emerging Market countries carried the day, despite some headwinds in demand faced in Europe and in the US food-services business.

In the case of Del Monte their Pet Food product sales were up close to 4% while Consumer Product sales dropped 6%. On the latter, increased competition and competitive promotional activity were a big part of the problem.

While neither press release specifically cited the cost pressures of higher input prices, it's clear that pricing power is diminishing for staple type companies in developed markets and that the stronger the sales/distribution of product is in new and emerging markets, the better.

As mentioned in the earlier post, consumer staple companies have been in favor for some time due to their expected outperformance as defensive stocks when markets crater. Their juicy dividends, too, are appealing to many investors especially in this low interest environment. So I'd expect the demand for these stocks to remain firm. But the spotlight, I believe, needs to continue to shine on their ability to maintain margins in the face of increasing competitive pressures to secure and hold onto market share which limits pricing power, and to effectively hedge their input costs, which thanks to weather patterns around the planet, continue to go up in the face of crop and harvest shortfalls in many ag products.

Disclosure: Long CPB, HNZ