Despite strong consumer spending, inflation continues to challenge the economy, positioning consumer staples as a dependable investment, with their steady demand unaffected by economic fluctuations.
In this environment, investors can consider picking up shares of fundamentally solid companies, PepsiCo, Inc. (PEP), Philip Morris International Inc. (PM) and Colgate-Palmolive Company (CL). Now, let us delve into the dynamics of the sector.
Consumer spending, which drives more than two-thirds of U.S. economic activity, continued its upward trend last month, rising by 0.4%. This follows a 0.6% increase in September. Clearly, the economy is holding steady, showing strong growth momentum in the early part of the fourth quarter.
However, the fight against inflation has lost some steam recently. Despite efforts, inflation has failed to retreat to the Federal Reserve’s desired 2% target. Adding to this challenge is the possibility of higher tariffs on imported goods under the incoming Trump administration, which could limit the scope for future interest rate cuts.
In this context, consumer staples stand out as a smart choice. These non-cyclical products are in constant demand, regardless of how the economy is performing. Whether the economy is thriving or struggling, people will still purchase essential items like food, beverages, and household goods. This offers a sense of stability for investors.
Consumer staples are also unique in their resilience to price fluctuations. Even as costs rise, demand for these goods remains relatively unaffected. People prioritize these products, making them a consistent investment, especially when economic uncertainty looms.
Now, let us explore the fundamentals of three standout consumer staple stocks, beginning with #3.
Stock #3: PepsiCo, Inc. (PEP)
PEP manufactures, distributes, markets and sells various beverages and convenient foods. Its segments include Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
On November 22, PEP announced the acquisition of 50% interest in Sabra Dipping Company, LLC and PepsiCo-Strauss Fresh Dips & Spreads International GmbH, securing full ownership of both companies. These acquisitions strengthen PEP’s portfolio and reinforce its market leadership by broadening its range of innovative offerings.
On October 1, PEP announced a definitive agreement to acquire Garza Food Ventures LLC, for a total transaction cost of $1.2 billion. The strategic acquisition adds an authentic Mexican-American brand to PEP’s portfolio, further diversifying its offerings and boosting its growth potential.
PEP’s trailing-12-month gross profit margin of 54.88% is 51.6% higher than the industry average of 36.19%. Its trailing-12-month levered FCF margin of 6.60% is 18.8% higher than the sector average of 5.56%. Likewise, the stock’s trailing-12-month asset turnover ratio of 0.92x is 5.5% higher than the industry average of 0.87x.
For the fiscal 2024 third quarter that ended September 7, PEP’s net revenues came in at $23.32 billion. Its core gross profit rose 1.4% from the year-ago value to $12.95 billion. Moreover, the company’s core operating profit rose 3.6% from the prior year’s quarter to $4.18 billion.
Additionally, core net income and core net income per common share attributable to PEP increased 2.6% and 2.7% year-over-year to $3.19 billion and $2.31, respectively.
Analysts expect PEP’s revenues for the fiscal fourth quarter ending December 2024 to increase marginally year-over-year to $27.98 billion. Its EPS for the ongoing quarter is expected to rise 9.4% year-over-year to $1.95. Moreover, the company topped the consensus EPS estimates in all four trailing quarters.
Shares of PEP have declined marginally over the past five days, closing the last trading session at $163.05.
PEP’s POWR Ratings mirror its solid fundamentals. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting
PEP has an A grade for Quality and a B for Growth. It is ranked #9 out of 32 stocks in the Beverages industry.
In addition to the POWR Rating highlighted above, you can check PEP’s ratings for Stability, Sentiment, Momentum, and Value here.
Stock #2: Philip Morris International Inc. (PM)
PM is a tobacco company that is working towards delivering a smoke-free future and improving its portfolio for the long-term to include products outside of the tobacco and nicotine sector. The company offers cigarettes and smoke-free products, including heat-not-burn devices, vapor products, and oral nicotine solutions.
On July 30, PM announced the signing of a memorandum of understanding with KT&G, South Korea’s leading manufacturer of tobacco and nicotine products. Through the agreement, PM will collaborate on regulatory submissions for KT&G’s heat-not-burn products, aiming for commercialization in the United States and creating new income streams.
PM’s trailing-12-month gross profit margin of 64.07% is 77% higher than the industry average of 36.19%. Its trailing-12-month EBITDA margin of 41.11% is 215.8% higher than the 13.02% industry average. Additionally, the stock’s trailing-12-month net income margin of 26.42% is 524.1% higher than the sector average of 4.23%.
For the fiscal 2024 third quarter that ended September 30, PM’s net revenues increased 8.4% year-over-year to $9.91 billion. Its adjusted operating income grew 11.2% from the year-ago value to $4.15 billion. The company’s adjusted EPS rose 14.4% from the prior year’s quarter to $1.91.
For the fiscal fourth quarter ending December 2024, Street expects PM’s revenue and EPS to increase 5.4% and 10.8% year-over-year to $9.54 billion and $1.51. Plus, the company has surpassed the consensus revenue estimates in all four trailing quarters.
PM’s shares surged 29.2% over the past six months and 39.3% over the past year to close the last trading session at $131.02.
PM’s solid prospects are projected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
PM has a B grade for Stability and Quality. Within the B-rated Tobacco industry, it is ranked #2 out of 9 stocks.
Click here to access PM’s ratings for Growth, Momentum, Value and Sentiment.
Stock #1: Colgate-Palmolive Company (CL)
CL manufactures and sells consumer products. It has two operational segments: Oral, Personal and Home Care; and Pet Nutrition. The company sells its products under various recognizable brands such as Colgate, elmex, hello, meridol, Sorriso, Tom's of Maine, Irish Spring, Palmolive and more.
CL’s trailing-12-month EBITDA margin of 24.34% is 87% higher than the industry average of 13.02%. Its trailing-12-month levered FCF margin of 14.82% is 166.7% higher than the sector average of 5.56%. Furthermore, the stock’s trailing-12-month net income margin of 14.26% is 237% higher than the 4.23% industry average.
For the fiscal 2024 third quarter that ended September 30, CL’s net sales increased 2.4% year-over-year to $5.03 billion. Its non-GAAP gross profit rose 7.1% from the year-ago value to $3.08 billion. Moreover, its non-GAAP operating profit increased 4.8% year-over-year to $1.08 billion.
Additionally, non-GAAP net income attributable to CL and non-GAAP EPS rose 5.6% and 5.8% from the prior year’s quarter to $750 million and $0.91, respectively.
The consensus revenue and EPS estimates of $5.05 billion and $0.90 for the fiscal fourth quarter ending December 2024 exhibit a year-over-year rise of 2% and 3.5%, respectively. Moreover, the company topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
Shares of CL have surged 4.5% over the past six months and 23.4% over the past year to close the last trading session at $97.11.
CL’s bright prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
CL has an A grade for Quality and a B for Stability. It is ranked #18 out of 56 stocks in the Consumer Goods industry.
to access CL’s Momentum, Sentiment, Growth and Value ratings.
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PEP shares were unchanged in premarket trading Tuesday. Year-to-date, PEP has declined -1.76%, versus a 28.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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