Is there a market interest in purchasing consumer stocks?
In recent times, the consumer goods sector has been grappling with a series of challenges that have led to contracting valuations for many companies. This trend, more pronounced in Europe than in the US, has had a significant impact on the share prices of firms such as Diageo.
Diageo, a leading player in the spirits industry, is trading under 15 times forecast earnings compared to 23 times at the end of 2019. This shrinking multiple has had a bigger impact on Diageo's share price than the change in earnings, indicating investor apprehension about the long-term value of brand power and consumer demand uncertainty.
The weakness in results and share prices is not limited to spirits firms. Breweries, beauty companies, luxury goods companies, and even consumer staples firms are experiencing similar struggles. Unilever, previously out of favor, is being rewarded with a higher multiple as markets trust in a turnaround. However, brands like Nestlé and Mondelez are not performing as well.
One of the key factors contributing to this trend is the rise in interest rates. Higher interest rates reduce the attraction of the steady dividends that many consumer stocks pay, making them less appealing to investors.
Another factor is the challenge of balancing pricing power against volumes. With consumer staples firms raising prices to pass on higher costs and protect margins, there has been a decrease in the volume of goods sold. This is a delicate balance that many companies are finding difficult to maintain.
Social shifts also play a role in the struggles of some industries. For instance, younger generations may drink fewer spirits due to changing social norms, which could have a significant impact on spirits firms.
The economic cycle is another factor to consider. Branded consumer staples are not reliably beating the market during this economic cycle, which is causing investors to become more wary of consumer brands.
Weaker long-term growth in emerging markets could mean fewer new consumers for consumer brands. This is a particular concern for companies that have relied on these markets for growth in the past.
Additional factors influencing valuation changes are brand strategy effectiveness, market perception, and innovation leadership. These factors can counteract or enhance valuation shifts depending on execution.
For example, Reckitt's acquisition of Mead Johnson in 2017 has been a specific problem for some staples firms. Similarly, companies currently experiencing reduced valuations include those facing factors such as currency appreciation (e.g., Swiss franc), increased tariffs (e.g., US tariffs), margin pressures from value-oriented business segments, and transitional effects from distribution contracts.
Despite these challenges, there are signs of hope. Colgate Palmolive has increased by 25% this year, indicating that some consumer stocks may still offer attractive investment opportunities. However, it seems that consumer stocks may get less of a valuation tailwind for a while as investors navigate these uncertain times.
New anti-obesity drugs could also curb demand for snack food, alcohol, and other impulses, which could further impact the consumer goods sector. It remains to be seen how companies will adapt to these challenges and what the future holds for the consumer goods industry.
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