Bloomberg
The consumer staples sector has been crushed this year, shedding light on a potential opportunity for long-term investors looking for quality contrarian plays.
Despite all the alarm since the broad indexes fell from their Jan. 26 records, the S&P 500 index is down only 0.9% (with dividends reinvested) for 2018 through April 24. But you can see how the consumer staples sector has really stood out, in a bad way:
| S&P 500 sector | Total return - 2018 through April 24 | Total return - 2017 |
| Consumer Staples | -11.7% | 13.5% |
| Real Estate | -7.3% | 10.8% |
| Telecommunications | -5.2% | 0.0% |
| Materials | -5.0% | 23.8% |
| Utilities | -3.0% | 12.1% |
| Industrials | -2.7% | 21.0% |
| Health Care | -0.6% | 22.1% |
| Financials | -0.5% | 22.2% |
| Energy | 1.8% | -1.0% |
| Information Technology | 2.3% | 38.8% |
| Consumer Discretionary | 3.4% | 23.0% |
| Source: FactSet | ||
The S&P 500 consumer staples sector has 27 stocks, and all but six have had negative returns this year. Dr Pepper Snapple Group is the top performer, returning 23%. But while sales per share are up 6%, their gross margin narrowed. This could mean they have been forced to lower prices or offer more discounts to achieve that growth.
Double-digit sales growth
We’re in the middle of earnings season, so many companies haven't reported their first-quarter results. But investors are concerned that consumer staples companies are losing pricing power as their customers find more and cheaper alternatives to well-known brands. Investors looking for bargains might be well served considering companies that have been able to improve their gross profit margins.
A company’s gross margin is its sales, less the cost of goods or services sold, divided by sales. It doesn’t take overhead expenses or extraordinary expenses into account, but it provides an indicator of the health of its core business. The gross margin can show the effect of discounting, if a company is forced to lower prices or offer incentives to maintain its market share, and show the positive effect of increasing demand for the company’s goods and/or services.
Ideally, a company’s sales are growing and its gross margin is widening or at least not narrowing. Among the 27 companies in the S&P 500 consumer staples sector, all but two (Hershey Co. and Coco-Cola Co. ) showed increases in quarterly sales per share for their most recently reported quarters through April 24.
Among the 10 companies that increased sales per share by more than 10%, all but four saw gross margins contract, according to FactSet:
| Company | Ticker | Increase in quarterly sales per share from a year earlier | Gross income margin - most recent quarter | Gross income margin - year earlier quarter | Date of most recent financial reporting period | Total return - 2018 through April 24 |
| Walgreens Boots Alliance Inc. | 22.3% | 23.18% | 24.27% | 02/28/2018 | -10% | |
| Kroger Co. | 19.9% | 20.06% | 20.12% | 02/03/2018 | -7% | |
| Church & Dwight Co. | 18.3% | 46.60% | 46.08% | 12/31/2017 | -9% | |
| Estée Lauder Cos. Class A | 15.6% | 80.07% | 80.02% | 12/31/2017 | 16% | |
| Coty Inc. Class A | 14.8% | 58.11% | 59.40% | 12/31/2017 | -16% | |
| Philip Morris International Inc. | 13.8% | 62.08% | 63.68% | 03/31/2018 | -21% | |
| Tyson Foods Inc. Class A | 12.5% | 14.37% | 15.74% | 12/30/2017 | -13% | |
| Brown-Forman Corp. Class B | 12.4% | 67.08% | 65.70% | 01/31/2018 | 1% | |
| Costco Wholesale Corp. | 10.6% | 12.92% | 12.90% | 02/18/2018 | 4% | |
| CVS Health Corp. | 10.5% | 16.33% | 16.61% | 12/31/2017 | -7% | |
| Source: FactSet | ||||||
We looked at sales per share rather than raw revenue figures because the per-share numbers reflect any dilution caused by the issuance of shares for any reason, including acquisitions that boost sales. Half of these companies have yet to report results for fiscal quarters ended March 31.
So among the 10 best sales growers, only Church & Dwight Co. Estée Lauder Cos. Brown-Forman Corp. and Costco Wholesale Corp. have managed to improve their gross margins. These stand out among the largest U.S. consumer staples companies, with the caveat that we have not yet seen any 2018 numbers for two of them.
Have your cake and eat it too
Here’s a second list showing the 10 S&P 500 consumer staples companies that have increased quarterly shares by any amount, rather than just by at least 10%, while also improving their gross margins:
| Company | Ticker | Increase in quarterly sales per share from a year earlier | Gross income margin - most recent quarter | Gross income margin - year earlier quarter | Date of most recent financial reporting period | Total return - 2018 through April 24 |
| Church & Dwight Co. | 18.3% | 46.60% | 46.08% | 12/31/2017 | -9% | |
| Estée Lauder Cos. Class A | 15.6% | 80.07% | 80.02% | 12/31/2017 | 16% | |
| Brown-Forman Corp. Class B | 12.4% | 67.08% | 65.70% | 01/31/2018 | 1% | |
| Costco Wholesale Corp. | 10.6% | 12.92% | 12.90% | 02/18/2018 | 4% | |
| Mondelez International Inc. Class A | 6.0% | 38.04% | 37.59% | 12/31/2017 | -7% | |
| Colgate-Palmolive Co. | 5.8% | 60.46% | 60.39% | 12/31/2017 | -11% | |
| Kellogg Company | 4.8% | 42.26% | 34.32% | 12/30/2017 | -10% | |
| J.M. Smucker Co. | 4.0% | 36.04% | 35.61% | 01/31/2018 | -7% | |
| Altria Group Inc. | 1.7% | 60.76% | 59.75% | 12/31/2017 | -22% | |
| Kraft Heinz Co. | 0.1% | 38.04% | 35.86% | 12/31/2017 | -27% | |
| Source: FactSet | ||||||
Increasing sales while increasing prices is no mean feat in the current environment, as new technology and business practices give consumer more choices.
No stock screening method is perfect, and this sector has some companies with fiscal quarters that don’t match the calendar, so having the freshest data is always a concern. But this list can be a useful place to begin your own research if you are looking to make a long-term investment in a consumer staples company that is putting up improving core numbers.