Valuation Dashboard: Consumer Staples - Update

|
Includes: ADM, CAG, DAR, DF, KR, RAI, SAFM, SENEA, SPTN, SPY, SVU, TSN, UNFI, UVV, WBA, WFM, XLP
by: Fred Piard

Summary

Valuation metrics in consumer staples.

Evolution since last month.

A list of stocks with better factors than their industries.

This article series provides a monthly dashboard of industries in each sector of the GICS classification. It compares valuation and quality factors relative to their historical averages in each industry.

Executive summary

All industries in Consumer Staples are overpriced for most valuation factors. However, Food & Staples Retail is cheaper than its historical average in P/FCF. The Food industry is close to fair value regarding P/E and P/FCF. Household Products are far above their quality baseline (measured by median ROE), which may partly justify overpricing in this group. Beverages are much less attractive: it is the most overpriced group according to 2 major valuation factors (P/E and P/FCF), and it is also below its baseline in quality.

Since last month:

  • P/E has improved a bit in Tobacco, Household Products, Personal Products.
  • P/S has improved in Tobacco and deteriorated in Food/Staples Retail.
  • P/FCF has improved in Food, is stable in Food/Staples Retail and deteriorated elsewhere.
  • ROE has improved in Personal Products, deteriorated in Beverages and is stable elsewhere.

The SPDR Select Sector ETF (XLP) has underperformed SPY by 8.5% in 3 months, most of it since the first week of November. The five S&P 500 Consumer Staples stocks with the best momentum in this period are ConAgra Foods Inc. (NYSE:CAG), Kroger Co (NYSE:KR), Reynolds American Inc (NYSE:RAI), Walgreens Boots Alliance Inc (NASDAQ:WBA), Whole Foods Market Inc (NASDAQ:WFM). CAG has hit a new all-time high in November.

Some cheap stocks relative to their industries

The stocks listed below are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection.

This strategy 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 is not a guarantee of future result. This is not investment advice. Do your own research before buying.

ADM

Archer-Daniels-Midland Co

FOOD

DAR

Darling Ingredients Inc

FOOD

DF

Dean Foods Co

FOOD

SAFM

Sanderson Farms Inc

FOOD

SENEA

Seneca Foods Corp.

FOOD

SPTN

SpartanNash Co

STAPLERETAIL

SVU

SUPERVALU INC.

STAPLERETAIL

TSN

Tyson Foods Inc.

FOOD

UNFI

United Natural Foods Inc

STAPLERETAIL

UVV

Universal Corp

TOBACCO

Detail of Valuation and Quality indicators in Consumer Staples on 12/7/2016

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

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

22.96

19.16

-19.83%

0.35

0.34

-2.94%

24.48

33.01

25.84%

10.16

9.78

0.38

Beverages

29.88

22.05

-35.51%

1.97

1.34

-47.01%

46.9

29.6

-58.45%

-2.35

7.06

-9.41

Food

23.12

20.25

-14.17%

1.25

0.91

-37.36%

32.83

27.51

-19.34%

9.52

8.43

1.09

Tobacco*

17.26

14.83

-16.39%

4.13

2.13

-93.90%

N/A

N/A

N/A

N/A

N/A

N/A

Household Products

26.21

21.4

-22.48%

2.08

1.3

-60.00%

32.55

30.55

-6.55%

49.46

17.18

32.28

Personal Products

23.33

18.05

-29.25%

2.73

1.51

-80.79%

22.13

20.7

-6.91%

2.82

2.1

0.72

* P/FCF and ROE are currently outliers in Tobacco

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below higher is always better.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

Momentum

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

If you want to stay informed of updates on this topic and other articles, click the "Follow" tab at the top of this article.

Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy later a paid subscription, at no additional cost to you).

Disclosure: I am/we are long SPY, 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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here