The FDA is investigating a peanut paste supplier, Peanut Corporation of America, in connection with a fatal outbreak of salmonella contamination that has hospitalized at least 90 persons and is being blamed for six deaths. Salmonella are bacteria that cause diarrhea, cramping, and fever. The FDA is urging consumers to avoid eating cookies, cakes, ice cream and other foods that contain peanut butter.
As a result, Kellogg's (NYSE:K) has recalled certain Austin and Keebler brands of crackers and cookies that contain peanut butter obtained from the Peanut Corporation of America.
On the other hand, Hershey (NYSE:HSY) is not affected by the outbreak in that the company does not purchase any peanut butter, peanuts, or peanut products from the Peanut Corporation of America. Peanut butter for Reese's Peanut Butter Cups is made in Hershey's own facilities under the company's oversight.
In general, product recalls in the consumer staples sector are not major drivers of a company's stock price. During the time of a product recall, demand weakens as consumers avoid the product for a limited period of time. Also, the companies experience inventory write-offs as the recalled products are destroyed. However, these events do not affect the organic earnings power from the continuing operations of the companies. Stock price weakness as a result of a product recall usually offers attractive entry points.
Even when the product recall requires permanent incremental costs going forward, such as the increased packaging costs Johnson & Johnson (NYSE:JNJ) experienced after cyanide-laced Tylenol capsules were discovered in October 1982, the 10% decline in the stock's price was quickly reversed within weeks.