After a great performance last year, 2014 is off to a much more dubious start. Investors appear concerned about the state of global economic growth. Normally, those hoping for relative safety, flock to consumer staple stocks. That's because companies that sell things that are used every day will weather an economic storm.
This may explain why consumer staple giant Procter & Gamble (NYSE:PG) shot higher after releasing its quarterly report, even though the results themselves were far from spectacular. Other staple heavy-weights, including Kimberly Clark (NYSE:KMB) and Clorox (NYSE:CLX), performed relatively well on the same day, even though the Dow Jones Industrial Average fell 300 points.
While staple stocks have performed extremely well, it can be debated whether their underlying business fundamentals deserve their new-found valuation multiples.
Give credit where it's due
To be sure, P&G, Kimberly Clark, and Clorox are doing well in managing costs and continuing to expand in emerging markets. At the same time, growth hasn't been spectacular by any means, and outlooks for the upcoming year look mediocre. Because earnings growth remains far behind their share price increases, the end result is ballooned valuation multiples for P&G, Kimberly Clark, and Clorox.
For instance, P&G's second quarter saw net sales remain unchanged from the same quarter last year. Excluding unfavorable foreign-currency impacts, organic sales increased 3%. Meanwhile, diluted earnings-per-share fell 1%, but increased 8% after stripping out currency effects. P&G's 2014 outlook calls for low to mid-single digit growth in sales and EPS.
Kimberly Clark reported its full-year fiscal results on the same day as P&G's second-quarter report. Like P&G, Kimberly Clark reported flat sales, while organic sales increased 4% in 2013. Adjusted EPS grew 10%. Looking ahead, Kimberly Clark expects similar sales and earnings growth rates in the upcoming year.
Clorox is set to report on February 4, and given the results from its closest peers, it likely will see low single-digit revenue growth after stripping out currency impacts. Clorox released a long-term growth plan last year, which it called the '2020 Strategy to Drive Long Term Growth.' In it, Clorox outlined its long-term growth initiatives, which call for 3% to 5% annual growth in net sales.
Should investors be wary of consumer staples stocks?
Of particular concern is that the market seems to be willing to pay higher multiples for what amounts to relatively modest growth. The outstanding share price performances of Procter & Gamble, Kimberly Clark, and Clorox on an otherwise terrible day were indeed impressive.
These gains were in addition to last years rallies their rallies, which saw their stock prices shoot higher. What remains now, however, are some high valuations for companies that can't be counted on for superior growth rates.
P&G shares exchange hands for 20 times its trailing twelve-month earnings. And, it holds a forward P/E multiple of approximately 19 times. Kimberly Clark trades for 19 times trailing earnings and 18 times forward earnings. Clorox falls right in-line with its peers, with a 21 trailing P/E multiple.
By comparison, the S&P 500 trades for about 17 times trailing earnings. The fact that consumer staples stocks are more aggressively valued than the broader market is a concern, since staples companies are traditionally slower-growth by nature.
Foolish final thoughts
While P&G, Kimberly Clark, and Clorox are extremely high-quality businesses that are very profitable, their stocks look fairly valued. Even great companies can be poor investments, if you pay too high a price for them. Investors may want to keep that in mind before buying P&G, Kimberly Clark, or Clorox at their current levels.