Many analysts expect the economy to witness recessionary pressures due to the lingering macroeconomic and geopolitical headwinds. Inflation has surged to its highest level in four decades and peace talks between Russia and Ukraine have shown no progress. As a result, supply disruptions continue to worsen, and energy and commodity prices remain at uncomfortably high levels.
Crude oil prices have been hovering above $100 per barrel. And historically, high crude oil prices have precipitated recessionary conditions. Moreover, the EU is contemplating banning Russian oil imports by the end of the year, and factory activity is shrinking in China, which may disrupt the crude oil supply further, leading to a surge in prices.
To lift the economy from the doldrums induced by the COVID-19 pandemic, the Federal Reserve had to adopt an accommodative policy by buying Treasury notes and bonds and keeping the interest rates near zero. The Federal Reserve had purchased long-term Treasury securities to inject money into the struggling economy to lower interest rates and encourage lending and investment. However, a lengthy spell of accommodative monetary policy has proven to have negative repercussions for the economy in the form of high inflation, a fall in savings, a rise in consumer spending, and escalating demand for a limited number of goods and services.
Therefore, the Fed plans aggressive interest rate hikes to control the surging inflation. The Fed aims to prevent consumers and businesses from spending by making borrowing more expensive, cooling demand, and keeping prices under control.
Economists are concerned that if the Fed raises the interest rates too quickly and aggressively, it might push the economy into a recession. Amid a recessionary environment, consumer staple stocks have been known to perform better as these companies withstand economic slumps better than other industries because of the inelastic demand for their products.
This is why today I’m going to analyze three prominent consumer staple stocks, PepsiCo, Inc. (PEP), Altria Group, Inc. (MO), and The Coca-Cola Company (KO), which are well-positioned to withstand an economic slump.
Consumer Staples: A Defensive Sector to Bet on Amid Recession Fears
Most industries struggle to stay afloat during a recession as they are susceptible to falling consumer sentiment and declining spending. However, the consumer staples industry has proven to be an outlier in a recessionary environment as it has performed well regardless of the situation of the economy.
Consumer spending changes during a recession. Generally, reduced spending power refrains consumers from spending on discretionary items or luxury products during an economic downturn. In contrast, consumers will always spend on essential items such as food, beverages, tobacco, household, personal products, and others as they cannot remove them from their budgets due to their utility.
According to research, the consumer staples sector is well known for its relative outperformance during market uncertainty. It acts as a defensive play for investors. Moreover, the consumer staple sector is not cyclical like other industries, and its earnings and cash flows remain stable even during economic contraction.
Consumer staples products have a stable and predictable pattern of demand that enables their manufacturers to outperform even during an economic downturn.
Investors’ interest in the consumer staple stocks is evident from SPDR Select Sector Fund – Consumer Staples ETF’s (XLP) 10.1% returns over the past year. According to the Absolute Reports' Consumer Packaged Goods (CPG) Market report, the global consumer packaged goods market is estimated to grow at a CAGR of 2.9% to reach $2.50 trillion by 2028.
Prominent Industry Participants
The Procter & Gamble Company (PG) and Kimberly-Clark Corporation (KMB) are two major industry participants. While PG has returned 18.7% over the past year, KMB has gained 2% over the past month. PG has a market capitalization of $380 billion, while KMB has a market cap of $45.82 billion.
PG’s President and CEO Jon Moeller said, “Our focus remains on the strategies of superiority, productivity, constructive disruption, and continually improving P&G’s organization and culture. These strategies have enabled us to build and sustain strong momentum. They remain the right strategies to manage through the near-term cost and operational challenges we’re facing and to deliver long-term balanced growth and value creation.”
3 Consumer Staple Stocks to Buy Now
PepsiCo, Inc. (PEP)
PEP is a global food and beverage company. It operates in the Frito-Lay North America, Quaker Foods North America, PepsiCo Beverages North America, Europe, and AMESA segments.
Analysts expect PEP’s EPS and revenue for fiscal 2023 to increase 8.9% and 4.1% year-over-year to $7.25 and $86.15 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 16.3% to close the last trading session at $167.76.
In terms of trailing-12-month gross profit margin and net income margin, PEP’s 53.42% and 12.57% are 51.4% and 138.8% higher than the industry averages of 35.27% and 5.26%, respectively. Also, its trailing-12-month EBIT margin and EBITDA margin of 14.87% and 18.04% are higher than the industry averages of 9.98% and 13.18%, respectively.
PEP’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a B grade for Quality. It is ranked #15 out of 38 stocks in the B-rated Beverages industry. Click here to see the additional ratings of PEP for Growth, Value, Momentum, Stability, and Sentiment.
Altria Group, Inc. (MO)
MO manufactures and sells smokable and oral tobacco products in the United States. The company provides cigarettes primarily under the Marlboro brand; cigars and pipe tobacco principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands, as well as provides on! Oral nicotine pouches.
For the quarter ending September 30, 2022, MO’s EPS is expected to increase 8.2% year-over-year to $1.32. Its revenue for fiscal 2023 is expected to increase 1.5% year-over-year to $21.36 billion. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 25.4% to close the last trading session at $55.38.
In terms of trailing-12-month gross profit margin and net income margin, MO’s 66.57% and 14.30% are 88.7% and 171.6% higher than the industry averages of 35.27% and 5.26%, respectively. Also, its trailing-12-month EBIT margin and EBITDA margin of 57.67% and 58.78% are higher than the industry averages of 9.98% and 13.18%, respectively.
MO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has an A grade for Quality. Within the B-rated Tobacco industry, it is ranked #3 out of 10 stocks. To see the other ratings of MO for Growth, Value, Momentum, Stability, and Sentiment, click here.
The Coca-Cola Company (KO)
Famous beverage company KO manufactures, markets, and sells various non-alcoholic beverages worldwide. It provides sparkling soft drinks, water, enhanced water, juice, dairy, and syrups. In addition, it sells products under Coca-Cola, Diet Coke/Coca-Cola Light, Coca-Cola Zero Sugar, and Fanta brands.
Analysts expect KO’s EPS for fiscal 2023 to increase 7.3% year-over-year to $2.65. Its revenue for the quarter ending June 30, 2022, is expected to increase 13.3% year-over-year to $10.56 billion. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 17.5% to close the last trading session at $63.44.
In terms of trailing-12-month gross profit margin and net income margin, KO’s 60.27% and 25.69% are 70.9% and 388% higher than the industry averages of 35.27% and 5.26%, respectively. Also, its trailing-12-month EBIT margin and EBITDA margin of 29.70% and 33.22% are higher than the industry averages of 9.98% and 13.18%, respectively.
KO’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It has a B grade for Stability, Sentiment, and Quality. It is ranked #16 in the Beverages industry. Click here to see the other ratings of KO for Growth, Value, and Momentum.
PEP shares were trading at $167.86 per share on Tuesday afternoon, up $0.10 (+0.06%). Year-to-date, PEP has declined -2.73%, versus a -12.01% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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