The Best Consumer Staples Stocks for Today

We've now seen a majority of the major consumer goods manufacturers report March quarterly earnings and there has been a distinct, common theme through the reports. It was something that you needed to know about Coca-Cola's (NYSE: KO  ) quarter, it was a potential worry for Procter & Gamble (NYSE: PG  ) , and it victimized Clorox (NYSE: CLX  ) as well. The trio of reports last week from Kraft, Sara Lee (NYSE: SLE  ) , and Church & Dwight were all also hurt by this development.

What is it? It's input-cost inflation and it seems to have executives at all of these companies on edge.

Of course, the big question on investors' minds is how much this will really affect the long-term investment thesis for these companies. We are, after all, talking about established companies, some that are more than 100 years old and selling brands that can be dated in decades.

The offending commodities
Consumer staples companies take simple goods like wheat, corn, oil, cotton, and cheese and turn them into the goods we know and love -- Kraft Mac & Cheese, Coke's namesake beverage, or P&G's Luvs diapers for instance. So when the prices for these inputs start to rise, it puts these companies in an awkward position because they either have to start raising prices for their customers or sheepishly tell their investors that profits are shrinking.

And, to be sure, input prices have most certainly been rising lately. Here's a look at a few major commodities.

Commodity

One-Year Price Increase*

Five-Year Price Increase

Corn

85%

211%

Coffee (robustas)

49%

74%

Cotton

40%

153%

Wheat

39%

47%

Oil

30%

60%

Plastic resin**

17%

29%

Aluminum

13%

(1%)

Wholesale cheddar (New England)

6%

37%

Source: The World Bank, CME Group, USDA, USGS, Plastics News, International Coffee Organization, and University of Wisconsin.
*For all but wheat, one-year price increase is current price versus average 2010 price. Wheat is 2010/2011 (June-April) average versus 2009/2010 (June-May) average.
**High-density polyethylene for blow molding homopolymer (high volume).

Corn in particular jumps off the page here, with its near-doubling over the past year and tripling over the past five years. Of course with that one we can explain away a good deal of the price rise by pointing to the expanded use of corn in ethanol.

But corn is hardly alone. The price jumps for coffee, cotton, wheat, and oil all look very worrisome. But how concerning are they really?

The real problem
The short answer is "very." But the problem isn't quite as straightforward as it seems. While big jumps in commodity prices aren't ideal, they also aren't all that uncommon. I think we're all uncomfortably familiar with the wild price swings in oil, but most other commodities are similarly volatile. Check out the swings in wheat prices over the past decade.

Year*

Year-Over-Year Price Change

2000

15%

2001

(6%)

2002

19%

2003

15%

2004

(13%)

2005

24%

2006

19%

2007

82%

2008

(34%)

2009

(26%)

2010

39%

Source: USDA.
*Each year begins in June of the year listed and ends in May of the following year.

In other words, consumer goods manufacturers should already be well-practiced in dealing with wild swings in commodity prices.

But this is a particularly nasty problem now because the economy still hasn't recovered. As it is, these companies have been trying to figure out an answer to the cheaper private-label offerings from retailers like Target, Walgreen (NYSE: WAG  ) , and Kroger. Though the brand giants would say they hate raising prices any time, under normal circumstances it would be a no-brainer for them to simply boost prices to help offset their rising costs. Today, that's a much bigger deal because with every bit that prices climb, manufacturers risk pushing customers into the all-too-welcoming arms of private-label products.

Of course, over the long term, both the current cost inflation and the soft economy will be transitory issues. And to the extent that consumers trade down to off-brand products to scrimp and save while they're worried about the future, there's a high likelihood that they'll trade back up to brand names once they feel more sanguine.

However, the big concern here is that in some cases consumers will start buying private-label goods to save money and realize, "Hey, Target-brand mac and cheese is pretty good!" or "I like Walgreen-brand hand lotion." And those are customers who may not come back.

Where to invest
The companies that are least at risk from this threat are those that have the most powerful brands and the most marketing might.

As far as brand power goes, it's a debatable issue, but a good place to start is with Interbrand's "Best Global Brands" list. Here are the consumer staple brands that made the top 50 of the 2010 list.

Key Brand Company Brand Value
Coca-Cola Coca-Cola $70.5 billion
Gillette P&G $23.3 billion
Marlboro Altria and Philip Morris International (NYSE: PM  ) $20 billion
Pepsi PepsiCo (NYSE: PEP  ) $14.1 billion
Nescafe Nestle $12.8 billion
Budweiser Anheuser-Busch InBev $12.3 billion
Kellogg's Kellogg $11 billion
Heinz H.J. Heinz $7.5 billion

Source: Interbrand.

Marketing might is a bit more straightforward -- the larger the company, the more marketing firepower it's likely to have.

What we're talking about here are companies that have convinced consumers that their products are good enough to pay extra for. When consumers are feeling cash-strapped and want to pinch pennies, the companies with big marketing budgets will have more opportunity to whisper sweet nothings in their ears, reminding them exactly why a particular brand-name product is worth the extra dollar.

But I also think we need to keep some perspective here as well. It's highly unlikely that we're talking about any of these companies crashing and burning unless management makes some colossally stupid decisions. Instead, choosing among the consumer staples stocks is a matter of avoiding the stocks that will deliver sub-par returns.

Of course, whichever consumer-staples stocks catch your fancy, it's a good idea to stay up-to-date on them. You can click the "+" signs above to add those stocks to your Foolish watchlist, or you can click here and start a new watchlist with any stocks you want.

Coca-Cola is a Motley Fool Inside Value pick. Philip Morris International is a Motley Fool Global Gains choice. Clorox, HJ Heinz, Kellogg, Coca-Cola, PepsiCo, and Procter & Gamble are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Altria, Clorox, Coca-Cola, PepsiCo, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares Philip Morris International, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1492301, ~/Articles/ArticleHandler.aspx, 10/25/2014 3:35:33 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement