The Strength in Consumer Staples: What's Up With That?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you're familiar with Saturday Night Live you've seen the recurring skit in which Kenan Thompson hosts a talk show where none of the celebrity guests ever get to talk because he constantly interrupts to sing his theme song, Ooowee, What Up With That? What Up With That?

With consumer staples stocks hitting 52 week and all time highs you wonder-what's up with that? Shouldn't defensives be sitting out this rally, much as Thompson's guests do? Companies like Campbell Soup (NYSE: CPB), J.M. Smucker (NYSE: SJM), ConAgra (NYSE: CAG), Hormel Foods, CloroxGeneral Mills and Hershey's are all hitting 52 week highs. Hormel is puzzling because despite missing on earnings is still powering higher. Valuations are getting stretched and the XLP, the consumer staple index is also at highs.

The Fear Factor

These moves don't look as though they're based on fundamentals but fear...fear of sequestration, higher gas prices, and an imminent market downturn. Like utilities were a go to sector last year it looks like consumer staples are the anointed hiding place this year. Hopes of another big Buffett buy like that of Heinz in these staples is unlikely so fear is undoubtedly at work here.

One other theory is a search for yield, anywhere and everywhere but in a fairly risk free sector. Also, retail investors and institutions who sat out the party are finally coming back but still risk averse.

Too Late To The Party?

Campbell's has moved up almost 20% since the end of 2012. At 17.63 P/E and a yield of 2.90% it looks okay but the PEG is saying otherwise at 2.79. New-ish CEO Denise Morrison had a full plate coming into the job with the 144 year old company's old-fashioned image needing a serious makeover. She has already acquired natural foods company Bolthouse Farms and added more "foodie" type soup offerings in on the go packaging to attract a younger demographic. The strategy seems to be working as the company beat on both top and bottom line when it reported Q2 earnings on February 13.

At an EV/EBITDA of 10.46 and return on equity of 62.08% Buffett might have done better to buy Campbell's. Except for the tricky little matter of ten times total debt to total cash. Pocket change to Warren. For a consumer staple defensive with yield it has a surprisingly large short interest of 8.10%. Several large and well-known hedge fund names like Ray Dalio, Jim Simons, Mario Gabelli and Krys Krystinik have stakes in the name. It's not that I don't like Campbell's, I just don't like it here.

The same situation applies with Smucker's. The family founded business is still family run with Richard Smucker as CEO. It's up 25% over the last year and the short interest is decreasing. It has a slightly higher P/E at 20.20 and a lower yield of 2.20% but a lower payout ratio than Campbell's. Its EV/EBITDA is slightly lower at 9.87 and the PEG is at 2.16.

Smucker's surprised on its February 15 earnings release against the higher bar raised by analysts. This is another company turning around its old image of the gingham pattern jarred jams with dozens of new and international brands including household coffee brand Folger's. But Smucker's  may seem overvalued  compared to new competitor Mondelez which has a PEG of 1.37 and a P/E of 16.34.

Smucker's, like Home Depot, has been a Wall Street fave these last few years running from the mid-$30s to its all time high of $95.30 close on February 28. It's a low beta name (.45) with pricing power and analysts have a median target of $100 which leaves little room for upside.

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The Omaha Connection

Buffett's purchase of Heinz surprised those who thought that Omaha based ConAgra would be a natural for Buffett if he was shopping in the food aisle. Likely, Buffett was looking for a more global and iconic brand. ConAgra has many familiar and enduring brands in its Consumer Foods division: Chef Boyardee, Blue Bonnet, Pam, Peter Pan, Hunt's, and the just completed acquisition of Ralcorp. It also has a Commercial Foodservice division of commercially branded foods and seasonings. ConAgra operates primarily in North America, however.

ConAgra has outperformed both these other names over the last year up 30.49% . It also has the highest yield at 3.00% with a 60% payout ratio. The P/E is the highest at 21.52 and the PEG at 1.80. It has the highest EV/EBITDA at 11.53.

On February 19 CEO Gary Rodkin updated and raised guidance adding  the Ralcorp purchase should add $0.05 for a raised outlook of $2.15 diluted EPS  for FY2013 and adding $0.25 for FY2014.. He said the dividend would be maintained at its current rate and debt from the acquisition will be a priority until 2015.

Make Room At The Party

Looking at the five year chart Smucker's is the obvious outperformer but after the Heinz takeover the other two are starting to ketchup (pun intended.) At these highs it wouldn't be prudent to go all in especially not in Smucker's. Campbell's with its metrics mostly smack dab in the middle of ConAgra and Smucker's would be my choice for a defensive staple. The company is introducing new products, healthy products and convenient products and putting some ad money and social media to work on these.

None of these are momo names that are going to get you dancing like on "What's Up With That?" but they won't leave you wondering why did they go down. If the market does tick down these won't decline as badly as they are still defensive names.

 


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