Emerging market concerns are at the forefront
Investors have sold U.S. consumer staples stocks in recent days fearing that slower economic growth in emerging markets will hamper personal care product sales. Furthermore, investors are concerned about currency devaluation in some emerging markets, which may reduce foreign profits that companies bring in. Citi analysts acknowledge that household and personal care product stocks have significant exposures to some emerging markets experiencing grim economic outlooks. They note, however, that with the exception of Avon Products, Inc. (NYSE:AVP), companies have less than 20% of their sales coming from emerging markets.
Personal care product companies increasing market share in developing markets
The Procter & Gamble Company (NYSE:PG) grew its sales in developing markets by 8% in local currencies during the past quarter. On the call announcing results, Procter and Gamble’s CFO stated that he expects developing market revenues to grow between 7-8% in the next quarter despite slower economic growth rates in some markets. The Procter & Gamble Company has also been able to grow its dividend by an average of 10.3% over the past 9 years (Source: F.A.S.T. Graphs) and it is currently yielding 3.18%. Even though F.A.S.T. analysts argue that The Procter & Gamble Company trades at a premium, they still believe that such premium is justified thanks to brand recognition and the high quality nature of the firm.
Kimberly Clark Corp (NYSE:KMB) experienced 11% sales growth in local currencies last quarter in its K-C International division, which includes Europe. In its quarterly call, the CEO estimated single digit growth rates for K-C International for 2014. Both Kimberly Clark Corp and PG are confident about revenue prospects in emerging markets.
Companies resilient to FX changes
Citi analysts acknowledge that drops in emerging market currency values may pressure profits for household and personal care product companies. However, Citi analysts believe that slower economic growth in a particular region does not necessarily mean that covered household and personal care product firms will see a growth slowdown commensurate with the region’s growth rate decline. On the contrary, household and personal care products are more resilient than general GDP when economic growth slows. Furthermore, some companies like Colgate-Palmolive Company (NYSE:CL) are very disciplined in increasing selling prices in foreign markets to compensate for negative currency impact on profits. Pricing power may be slightly lower for firms relative to prior years, in Citi’s view, but such power is relevant enough to help household and personal care product companies to weather volatile currency markets.