almost 3 years ago • 3 mins
The world’s biggest consumer staples companies stunned analysts to report stronger-than-expected quarterly updates last week, proving that the best offense really is a great defensive stock.
✍️ Connecting The Dots
Consumer staples were in an odd position at the start of April: their stocks have been among the worst-performers so far this year, and analysts – whose estimates for most industries had risen along with their share prices – didn’t adjust their expectations for the sector’s earnings. That set the scene for their results to come in better than expected, and for their stocks to shoot higher.
But it’s still quite a big ask for staples, which tend to sell products that people buy no matter how the economy’s doing. In other words, their sales don’t ebb and flow much. This time around, though, they noticeably ticked upwards – and so did the companies’ stocks. Just look at Heineken: the world’s second-biggest brewer saw its beers back in vogue as more people ventured to restaurants again. Of course, there were outliers too: France’s Danone, for one, fell short of expectations, with the pandemic continuing to dent demand for its bottled water and baby food.
For forward-looking investors, the thing they’ll want to know about staples’ longer-term prospects is whether companies can raise product prices without risking sales. Those that have struggled to do just that have come under pressure from activist investors, who’ve pushed them to sell off underperforming segments and restructure their businesses. Not Coca-Cola, though: it managed to raise its product prices in North America – its biggest market – by 4% last quarter.
1. Pricing affects profit more than volume.
There’s a good reason investors are so focused on a company’s “pricing power” – that is, its ability to raise prices and boost profits without losing customers. Assume that it costs a company $2 to make a product that it sells for $5. If it sells 100 of them, it’ll earn $500 in sales and $300 in profit. If it sells 110 products (10% more), it’ll have sales of $550 and profit of $330 (10% higher). Now imagine it sells 100 at a 10% higher price ($5.50): its sales of $550 will be 10% higher, but its profit will be $350 – 17% higher than before.
2. But volume growth is still the bigger opportunity.
Still, between low inflation and the rise of private-label challenger brands, hiking prices is a tough prospect for consumer staples companies. The bigger growth opportunity, then, probably lies in selling more products – a.k.a. Increasing volume. Everyday Western drinks like cola and energy drinks, for instance, aren’t as popular in emerging markets, so upping their sales there is one way to go. Another is selling new products to tap into a new group of customers in existing markets – just like the biggest brewers are doing with alcohol-free beer.
🎯 Also On Our Radar
There’s a new sign that Intel is losing market share to rivals: the tech giant’s earnings update last week showed a drop in data center sales. That’s a cause for concern among the company’s investors because it’s Intel’s most profitable unit, meaning it’ll have a knock-on effect on the firm’s overall profit. Zooming out, it also goes to show how even tech stalwarts aren’t safe from new competition…
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.