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					                        Consumer Staples
                Good Bets for an Economic Downturn


    Before we go on into which                20oz. bottle of soda in which a 20 to 40
consumer staple stocks can be safe            cent increase will not affect sales at all.
picks during a bear market or global
economic slowdown we should first                 The second advantage is the
describe to the reader what exactly           companies’ ability to gain market
consumer staples means. The simple            share outside the United States. These
definition for consumer staples is: The       three large cap companies are better
sector in the global markets that             suited to hedge U.S. economic
manufactures and/or sells food                slowdown with increased global sales
products, beverages, tobacco, and             with the help of the weak dollar and
household products. Examples are              more integrated global economy that
those such as Proctor & Gamble,               the mid and small cap companies
Kimberly-Clark, Kelloggs, General             might not be able to do as well.
Mills, and Coca-Cola.
                                                  And third is the necessity of the
   This sector, many people feel may          products they make or sell. It doesn’t
be immune to the current market               take a genius to understand that no
downturn. The main reason why the             matter how harsh the economic
consumer staples sector may be                slowdown becomes or how long it
immune is the ability to pass on higher       remains, it’s pretty hard for a
commodity costs to their customers.           household to live without laundry
                                              detergent to clean the clothes, diapers
    With that being said, this paper          for the babies, cereal for breakfast, and
will focus on three consumer staple           a bottle of coke or vitamin water for
companies: Proctor & Gamble,                  lunch.
Kelloggs, and Coca-Cola that the
writer of this paper feels are good               P&G has performed better than it’s
stock picks in this bear market.              Dow Jones Industrial Average over the
                                              past three months from mid January
    These companies just noted have           through mid April (Range is from
three distinct advantages that many           January 15, 2008 through April 15,
other companies in different market           2008). The following graph will show
areas don’t have. One is as mentioned         the outperformance versus the Dow
before is the ability to pass on higher       Jones Industrial Average:
commodity costs to the consumer
because of the necessity of their goods
to the consumer and because the price
of their product is minute compared to
the disposable income of the
customer. An example is Coca-Cola’s



                                          1
 72                                                                                                                                               13000           Second is the continuing success
                                                                                                                                                  12800
                                                                                                                                                              of sales of P&G being done outside
 70
                                                                                                                                                  12600
                                                                                                                                                              the United States to offset weakness in
 68                                                                                                                                               12400
                                                                                                                                                              the slowing U.S. market.
                                                                                                                                                  12200
 66
                                                                                                                                                  12000
                                                                                                                                                                 Percentage of sales in developing
 64                                                                                                                                               11800
                                                                                                                                                              markets has increased since FY01.
                                                                                                                                                  11600
 62
                                                                                                                                                                                    % Sales, Developing Markets
                                                                                                                                                  11400

 60                                                                                                                                               11200        35%
      1/15/08

                1/22/08

                           1/29/08

                                     2/5/08

                                              2/12/08

                                                        2/19/08

                                                                  2/26/08

                                                                            3/4/08

                                                                                        3/11/08

                                                                                                  3/18/08

                                                                                                            3/25/08

                                                                                                                      4/1/08

                                                                                                                               4/8/08

                                                                                                                                        4/15/08
                                                                                                                                                               30%


                                                                                                                                                               25%
                                                                  P&G                DJIA
                                                                                                                                                               20%


                                                                                                                                                               15%

    P&G has all three advantages                                                                                                                               10%

previously mentioned.        First and                                                                                                                          5%
foremost,     their    products     are
                                                                                                                                                                0%
necessities to say the least. Some of                                                                                                                                        FY01                FY06                    FY10 est.


their necessity consumer products
include: Duracell batteries, laundry                                                                                                                              Not only has sales increased from
care such as Tide, Dowdy, and Cheer.                                                                                                                          developing markets, but for over 10
Baby care products such as Pampers                                                                                                                            years now P&G has earned over 50%
and Charmin.        Shaving products                                                                                                                          of revenues overseas.        This is
including the Braun and Gillette                                                                                                                              especially news worthy because now
labels, and Oral care including Crest                                                                                                                         with a weaker dollar P&G can earn
and Scope.                                                                                                                                                    additional revenues from overseas and
                                                                                                                                                              currency conversions into the dollar
    These products, which has seen                                                                                                                            will boost revenues.
higher production costs have been
passed on to consumers in the form of                                                                                                                            Financial wise, P&G looks solid as
higher prices and have been                                                                                                                                   well. Revenues continue with robust
successfully done so because of their                                                                                                                         growth:
importance and lack of substitutions.
In economics, phenomena referred to                                                                                                                             $90,000
this is known as low price elasticity                                                                                                                           $80,000

demanded.                                                                                                                                                       $70,000

                                                                                                                                                                $60,000

                          Price Elasticity Demanded is                                                                                                          $50,000


                % Change in Quantity Demanded                                                                                                                   $40,000


                    % Change in Price                                                                                                                           $30,000

                                                                                                                                                                $20,000



    When the Elasticity is below one
                                                                                                                                                                $10,000

                                                                                                                                                                   $-
which we would see with P&G, the                                                                                                                                            2003       2004        2005           2006           2007

rise in goods sold by P&G would not                                                                                                                           in millions


effect sales, resulting in steady profit                                                                                                                      In millions of dollars
margins and a healthy stock price.



                                                                                                                                                          2
Revenues: FY2003 to FY2007                    exchange rate of $131 million and will
(millions)                                    continue to rise over the quarters
2007         $ 76,476                         ahead.
2006         $ 68,222
2005         $ 56,741                             It’s strong revenue growth from
2004         $ 51,407                         outside the US, ability to pass along
2003         $ 43,377                         higher commodity costs to consumers,
                                              healthy balance sheets and cash flow,
    Over the past four quarters EPS           and not to mention the necessity of the
and operating margins have shown              items they sell, make P&G a good bet
virtually consistent gains despite a          in the months ahead.
global    slowdown      and   higher
production costs.                                 Coca-Cola has also outperformed
                                              its Dow Jones Industrial Average
    EPS: Quarterly from                       components on a YTD basis (Jan 1,
     3/31/07- 12/31/07                        2008-April 15, 2008).
12/31/2007      $ 1.04
9/30/2007       $ 0.99                                                                                    DJIA vs. KO
6/30/2007       $ 0.79                         13500                                                                                                                                                                                                  66

3/31/2007       $ 0.73                                                                                                                                                                                                                                64
                                               13000
                                                                                                                                                                                                                                                      62

    Also, operating margins have been          12500
                                                                                                                                                                                                                                                      60
steady as well:                                                                                                                                                                                                                                       58
                                               12000

                                                                                                                                                                                                                                                      56
Operating Margins:                             11500

3/31/07- 12/31/07                                                                                                                                                                                                                                     54


12/31/2007              % 21.85                11000                                                                                                                                                                                                  52
                                                       1/2 /2008

                                                                   1/9 /2008

                                                                               1/16 /2008

                                                                                            1/23 /2008
                                                                                                         1/30 /2008

                                                                                                                      2/6 /2008

                                                                                                                                  2/13 /2008

                                                                                                                                                2/20 /2008

                                                                                                                                                             2/27 /2008

                                                                                                                                                                           3/5 /2008

                                                                                                                                                                                       3/12 /2008

                                                                                                                                                                                                    3/19 /2008
                                                                                                                                                                                                                 3/26 /2008

                                                                                                                                                                                                                              4/2 /2008

                                                                                                                                                                                                                                          4/9 /2008
9/30/2007               % 21.87
6/30/2007               % 17.64
3/31/2007               % 19.50                                                                                                                DJIA                       KO




     Don’t forget the balance sheet as        DJIA VS. KO YTD (Jan 1 ’08–Apr 15’08)
well. P&G continues to display a              Coca-Cola        0.40%
strong balance sheet with a healthy           DJIA             -5.22%
Asset to Debt Ratio and over $5.3
billion in cash on hand to finance                Prospects for Coca-Cola look good.
themselves in any form of severe credit       Coca-Cola has two concepts working
crisis.                                       with the company.        One is the
                                              emerging market and sales outside
    Cash flow analysis also confirms a        North America that are contributing to
healthy company.      Operating cash          its profits and second is the relative
flows continue to be positive and             ease of passing along commodity costs
healthy, reaching over $3 billion in          to the consumer, though not as easy as
each of the previous four quarters.           P&G.
And currency exchange rates continue
to be a nice boost in cash, as the 4th           First quarter 08’ earnings for Coca-
quarter of 2007 saw a positive currency       Cola increased 18% from the first


                                          3
quarter of 07’ due to the continuing
weak dollar and sales outside North                                  Revenues (in millions)
America. EPS were $ 0.64 cents, with           $35,000
80% of profit attained from outside the
                                               $30,000
United States.
                                               $25,000


    The company, which has seen flat           $20,000


sales in the US, is addressing the             $15,000

problem with acquisitions such as the          $10,000

Glaceau brand, which includes the               $5,000

healthy vitamin water to compensate               $-
for the trend of Americans that want to                   2003       2004         2005        2006   2007

eat and drink more healthy food and
beverage products. Also, Coke has              KO Revenues (millions)
introduced Coke Zero, a strong
contributor to the US and global sales                 2007      $           28,857
which offers Coke taste at zero                        2006      $           24,088
calories.                                              2005      $           23,104
                                                       2004      $           21,742
    Coca-Cola continues to diversify                   2003      $           20,857
their products for all global sales to
appeal to all tastes and culture                  Operating Margins and EPS have
satisfaction. Coca-Cola has popular           been mixed, but show signs of
energy drinks such as Full-Throttle,          strengthening. The following four
their classic soft-drink Coke and             quarters Operating Margins and EPS
Sprite, Powerade sports drinks and            are:
sports water, and Teas and coffees
such as: Georgia coffee, Golden Peak,          Operating Margins
and Haru Green Tea which has seen
large successes in the U.K., European           3/28/2008        25.40%
                                               12/31/2007        20.82%
Union area, and especially China,
                                                9/28/2007        23.78%
where teas are very popular and Coca-           6/29/2007        29.35%
Cola has a big presence their as a
major 2008 Beijing Olympic sponsor.            EPS (excluding items)
Volume growth in China was reported
at a 20% increase from a year earlier.          3/28/2008        $            0.65
                                               12/31/2007        $            0.52
     Coke, like many companies will             9/28/2007        $            0.72
see higher commodity costs, but it is           6/29/2007        $            0.82
felt that these commodity costs will be
able to be passed to the consumer with            While that may not seem better
little objection.                             quarter after quarter, remember 1st
                                              quarter year over year from 1Q 08’
   With global sales rising, ability to       compared to 1Q 07’ was much better.
pass on costs to consumers, and a             And over the year we will see their new
currency in favor of U.S. corporations,       acquisitions and strategic product
revenues for the Coca-Cola Company            lineup come into play.
have been growing strong.


                                          4
                                                                                                                                                                                                 These products, which are essential to
   Balance sheets continue to show a                                                                                                                                                             daily life is also sold globally.
healthy company. And operating Cash                                                                                                                                                              Kelloggs has a presence in the market
Flow show positive numbers. All this                                                                                                                                                             place in over 180 countries in the
adds to a strong healthy company and                                                                                                                                                             world. And with a growing and
hence, healthy market capitalization in                                                                                                                                                          emerging middle class in many
the coming months of US and global                                                                                                                                                               developing nations, why on earth
economic downturn.                                                                                                                                                                               would you short Kelloggs stock.

    The Kelloggs Company, on the                                                                                                                                                                     Focusing on fundamentals, the
threshold of the Large Cap world                                                                                                                                                                 balance and cash flows are solid.
should be a solid pick in the coming                                                                                                                                                             Kelloggs maintains a healthy balance
months ahead.        Not only can a                                                                                                                                                              of assets to debt and equity which has
company like Kelloggs pass along                                                                                                                                                                 provided consistent returns on assets
higher costs to consumers, but                                                                                                                                                                   and equity. And also as mentioned
Kelloggs has announced for the year                                                                                                                                                              with the other two companies, we see
that it has hedged 70% of the rising                                                                                                                                                             strong positive operating cash flows
commodity costs this year through the                                                                                                                                                            with steady use of cash in capital
agriculture futures markets.
                                                                                                                                                                                                 expenditures, which shows the
                                                                                                                                                                                                 company’s ease and eager to expand
    Need proof the Kelloggs company
                                                                                                                                                                                                 and improve operations as they
is a solid bet for this high commodity
                                                                                                                                                                                                 become larger and more global.
slow economic volatile time? The
Kelloggs company year to date (YTD –
1/1/08 – 4/15/08) has gained 3.63% of                                                                                                                                                               - Mark Templeton; May 2008
positive territory for the year while the                                                                                                                                                           Finance Research Paper Vol. I No.
NYSE, which Kellogss is a part of has                                                                                                                                                               I
shed -6.94% YTD.

                                                       Kelloggs vs. NYSE
  9800                                                                                                                                                                                  56

  9600
                                                                                                                                                                                        54
  9400

  9200                                                                                                                                                                                  52

  9000
                                                                                                                                                                                        50
  8800
                                                                                                                                                                                        48
  8600

  8400                                                                                                                                                                                  46
  8200
                                                                                                                                                                                        44
  8000

  7800                                                                                                                                                                                  42
         1/2/2008

                    1/9/2008

                               1/16/2008

                                           1/23/2008

                                                        1/30/2008

                                                                    2/6/2008

                                                                               2/13/2008

                                                                                           2/20/2008

                                                                                                       2/27/2008

                                                                                                                   3/5/2008

                                                                                                                              3/12/2008

                                                                                                                                          3/19/2008

                                                                                                                                                      3/26/2008

                                                                                                                                                                  4/2/2008

                                                                                                                                                                             4/9/2008




                                                                                           NYSE                    K




    Kelloggs has a very impressive
lineup of necessary food essentials that
are healthy and popular and include:
Kelloggs, Keebler, Pop Tarts, Eggo,
Cheez-It, Nutri Grain, Special K,
Morning Star Farms, and Plantation.


                                                                                                                                                                                             5
References and Notes

   1. Theory of Price Elasticity:             7. Kelloggs agriculture hedge:
      Wikipedia; Price Elasticity of             March 24, 2008; Against the
      Demand (2008)                              Grain: Food Firms Hedge
      http://en.wikipedia.org/wiki/              Costs
      Price_elasticity_of_demand                 http://www.wsj.com
                                                 (subscription required)
   2. Information on P&G products:
      Product Site Map (2008);                8. Kelloggs     Products    and
      http://www.pg.com/common                   overview: Our Company (2008);
      /product_sitemap.jhtml                     http://www2.kelloggs.com/Ge
                                                 neral.aspx?ID=466
   3. Stock prices and information
      on balance sheet, income                9. The writer of this article can be
      statements, and cash flows                 reached at
      from                                       mrktempleton@aol.com
      http://finance.yahoo.com/
      http://www.wsj.com
      (subscription    required for
      wsj.com)

   4. Information on P&G emerging
      market sales: P&G Presentation
      at Bernstein Deck June 2007;
      http://www.scribd.com/doc/2
      81866/Procter-Gamble-
      presentation-at-Bernstein-
      Deck-June-2007

   5. Information on Coca-Cola’s
      product line: The Coca-Cola
      Company,      Satisfying your
      needs (2008);
      http://www.thecoca-
      colacompany.com/brands/ind
      ex.html

   6. Detail of Coca-Cola’s 1st quarter
      results:   April    17,     2008;
      Emerging Markets Boost Coke
      http://www.wsj.com
      (subscription required)




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