The consumer sector is showing signs of a rebound, with key economic indicators pointing to better days ahead. The U.S. Commerce Department and Labor Department released new data this week that shows a recovery in retail sales and a taming of core inflation in March.
And as a growing number of economists declare the worst of the global economic downturn to be over, the upcoming wave of earnings reports for the consumer goods sector is all the more anticipated. In light of this we scoured the sector to find these, the six consumer goods stocks to watch in the coming quarter.
We start with soda giant PepsiCo , which in March announced that it had completed the $7.8-billion acquisition of its two largest bottlers -- Pepsi Bottling and PepsiAmericas -- an act that earned praise in the investment community. The company has projected pre-tax annualized synergies of about $400-million by 2012 from the deal.
But while Argus Research analyst Erin Smith agrees that the big purchase should gradually lead to substantial benefits for Pepsi -- it would consolidate a great majority of the company's North American selling and delivery systems into a single unit -- she has expressed concern about volatile results this year due to integration issues and ongoing challenges in the developed markets. Ms. Smith also notes that even though the stock has recently climbed, it could, very likely, end up moving in line with the S&P for a couple of upcoming quarters.
That said, when Pepsi reports, Ms. Smith says she would like to see how the integration of Pepsi and its bottlers are coming along. "I'd like to see if there's continued improvement in volumes at Pepsi.... I'd like to see if there's been any improvement in carbonated soft drinks volumes," she said.
Ms. Smith says she would also like to determine more about whether Pepsi is still seeing weakness in developed markets, or whether it's been seeing improvements.
Argus Research, for its part, is raising its 2010 earnings estimate for Pepsi to $4.18 a share from $4.16 a share. Argus said that Pepsi posted a solid fourth quarter, but that volume was upset by softness in the North America beverage category, the heaviness of promotions in its North American snack unit, and lower Europe snack volumes.
Following the coattails of rival Pepsi, with its bottling acquisitions, Coca-Cola in February announced that it has agreed to buy the North American bottling business of its bottler Coca-Cola Enterprises. The aforementioned Argus declared this to be a good move, in that it will enable Coke to bolster its bottling operations, cut down costs and beef up its product portfolio, all of which would help to strengthen the company's relationships with customers.
Still, Ms. Smith warned that the North American market will likely remain challenging, and that its bottling deal probably won't be accretive to earnings until 2012. Coke said it expects the transactions to generate about $350-million in synergies over four years, in the substantially cashless deal. As part of the deal, Coca-Cola Enterprises has agreed to buy Coke's bottling businesses in Norway and Sweden, while obtaining the right to buy the controlling stake in Coke's German bottler.
When Coke reports, Ms. Smith, for her part, will be keen to find out whether Coke and its rival Pepsi are "both seeing the same thing .. or is one company seeing one thing and the other seeing something else?" The question she says she'll be keeping in mind for both companies is whether they're both seeing volume trends improving in developed markets and in their carbonated soft drinks businesses, as the economy picks up the pace.
Argus Research is raising its 2010 earnings estimate from $3.40 a share to $3.43 a share, encouraged by Coke's improved volume trends, such as a 5 per cent rise in unit case volume during the fourth quarter and 3 per cent increase during the year. Argus Research also cited a 3 per cent rise in sparkling or carbonated drink volumes and a 9 per cent rise in still or non-carbonated drink volumes in that quarter, with the greatest growth coming from international markets.
Procter & Gamble