Valuation Dashboard: Consumer Staples - Update

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Includes: CALM, CCE, CENTA, CPB, GMCR, HRL, INGR, K, PEP, SAFM, SENEA, SPTN, SPY, TSN, UVV, XLP
by: Fred Piard

Summary

4 key factors are reported across industries in Consumer Staples.

They give a valuation status relative to history.

They give a reference for picking stocks in each industry.

This monthly series of articles provides a valuation dashboard in sectors and industries. I follow up a certain number of fundamental factors and compare them to historical averages. This article covers Consumer Staples. The choice of the fundamental ratios used in this study has been justified here and here. You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A list of stocks to consider is provided in the conclusion.

Methodology

  • Four industry factors are calculated: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors.
  • They are compared with their own historical averages. The difference is measured in percentage for valuation ratios and in absolute for ROE. For valuation factors it can be interpreted as a percentage in under-pricing relative to a historical baseline. It points to over-pricing when negative. In all cases, including ROE, the higher the better.

Industry valuation table on 2/20/2016

The next table reports the 4 industry factors. For each factor, the next "Avg" column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next "D-xxx" column is the difference between the historical average and the current value. So there are 3 columns relative to P/E, and also 3 for each ratio.

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

Food&Staples Retail

20.86

19.16

-8.87%

0.37

0.34

-8.82%

40.42

33.01

-22.45%

11.13

9.78

1.35

Beverages

30.33

22.05

-37.55%

2.35

1.34

-75.37%

46.73

29.6

-57.87%

6.27

7.06

-0.79

Food

22.64

20.25

-11.80%

1.3

0.91

-42.86%

29.67

27.51

-7.85%

8.29

8.43

-0.14

Tobacco*

24.08

14.83

-62.37%

3.77

2.13

-77.00%

N/A

N/A

N/A

N/A

N/A

N/A

Household Products

28.39

21.4

-32.66%

2.02

1.3

-55.38%

34.24

30.55

-12.08%

38.58

17.18

21.4

Personal Products

16.14

18.05

10.58%

1.76

1.51

-16.56%

17.34

20.7

16.23%

-9.12

2.1

-11.22

Click to enlarge

* P/FCF and ROE are currently outliers in Tobacco

Valuation

The following charts give an idea of the current status of industries relative to their historical average. The higher is the better.

Price/Earnings:

Price/Sales:

Price/Free Cash Flow:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the SPDR Select Sector ETF (XLP) with SPY (chart from freestockcharts.com).

Click to enlarge

Conclusion

The Consumer Staples sector has outperformed the broad market by about 11% in 3 months. The five S&P 500 Consumer Staples stocks with the best momentum in this period are Campbell Soup Co (NYSE:CPB), Keurig Green Mountain (NASDAQ:GMCR), Hormel Foods Corp (NYSE:HRL), Kellogg Co (NYSE:K), Tyson Foods Inc. (NYSE:TSN). All of them except GMCR have hit an all-time high last week.

Valuation factors have worsened since last month, except P/E for Beverages. ROE has improved for Food and Beverages. No industry looks really attractive. The Personal Products group has 2 valuation factors out of 3 pointing to underpricing, but the ROE factor is below the historical average. The Household products group may partly justify its overpricing with a ROE far above the baseline.

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the Consumer Staples sector. They are all cheaper than their respective industry for 3 of the most relevant valuation factors simultaneously: Price/Earnings, Price/Sales, Price/Free Cash Flow. Then they are selected for their higher Return on Equity.

This screen updated and rebalanced monthly has an annualized return of 13.46% and a drawdown about -33% for a 17-year backtest. The sector ETF XLP has an annualized return of 6% on the same period. Past performance, real or simulated, is not a guarantee of future return. This list may be considered an entry point for further due diligence, or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

CALM

Cal Maine Foods Inc

CCE

Coca-Cola Enterprises Inc

CENTA

Central Garden & Pet Co

INGR

Ingredion Inc

PEP

PepsiCo Inc

SAFM

Sanderson Farms Inc

SENEA

Seneca Foods Corp.

SPTN

SpartanNash Co

TSN

Tyson Foods Inc.

UVV

Universal Corp

Click to enlarge

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Disclosure: I am/we are long TSN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.