Altria Group has recently been second in market share for tobacco products.
Chris Goodney/Bloomberg
Inflation has been a top concern for investors. But by looking in the right places—such as consumer staples—investors can find stocks that could benefit from higher prices.
Inflation expectations for the decade ahead have jumped to 2.3% from 1.6% at the end of September, according to St. Louis Fed data. The worry—which has already come to fruition—is that interest rates will surge. That makes stocks less attractive and weighs on valuations. Plus, the rising cost for companies to buy raw materials pressures profit margins, unless a company can raise prices without losing market share.
The other headwind for stocks is that their dividend yields become less attractive when yields on safe government bonds rise.
Yet some consumer-staples companies can benefit from inflation, especially if their products are deemed essential and consumers will pay up for them. Still, those with a competitive advantage have an easier time hiking prices.
To be sure, higher inflation expectations have hurt many consumer-staples shares this year; economic demand is firming, driving investors’ money into more economically sensitive stocks. The Vanguard Consumer Staples exchange-traded fund (ticker: VDC) is down 0.3% year to date, underperforming the S&P 500’s 4.7% gain.
RBC Capital Markets strategists surveyed their analysts for consumer-staples stocks that could enjoy an inflationary benefit. Here are three:
“ Altria and Constellation Brands stand out as best positioned for inflation as category leaders with pricing power relative to their peer group,” the RBC strategists wrote in a note.
Altria Group (MO) has recently been second in market share for tobacco products, according to data from CSI Market. It’s No. 1 in smokeless product market share. This indicates its products are in favor with customers and they’re likely to pay up. Still, its gross margin is expected to hover around 65% for the next few years, with earnings only growing in the mid-single digits, according to FactSet data, but strong pricing could drive those results up. Plus, the stock trades at roughly half of the earnings multiple the average stock on the S&P 500 trades at, so if sentiment on the stock improves, it could have significant upside.
Constellation Brands (STZ) management said on its most recent earnings call that it expects to raise prices on some alcohol products, hikes that will continue into 2022, as product brand strength has been strong. The company is also seeing higher materials costs, though gross margins are expected to remain around 52% for the next few years, so the pricing power behaves more like a profit protector rather than a driver.
“Strong brands are largely able to pass on cost increases to the consumer, but we expect Anheuser-Busch InBev to benefit as stronger earnings will drive quicker degearing,” RBC said.
Simply put, Anheuser-Busch’s (BD) pricing power will help it navigate higher costs, driving earnings up almost 30% annually, according to FactSet consensus estimates. The “degearing” means the company, with a market cap of $87 billion, can add equity value through earnings, while working down its net debt to $55 billion by 2023 from $64 billion currently. The combination of all of these dynamics could be a significant driver of the stock, which trades at an earnings multiple in line with the Euronext Top 100 index. The average analyst rates the stock Overweight.
Write to Jacob Sonenshine at [email protected]
