Watch out for these consumer stocks

Consumer stocks have been performing well this year. Assessing the consumer companies that COL Financial covers, their stocks generated an average return of 15.7 percent for the year-to-date period, significantly outperforming the Philippine Stock Exchange Index’s (PSEi) return of 5.6 percent for the same period.

Numerous factors are responsible for this, the most important of which is slowing inflation.

Recall that inflation was a major problem last year as it was on a steady rise, hitting a peak of 6.7 percent from an average of only 2.9 percent in 2017. Numerous factors pushed up inflation, including the strong economy, higher food prices, higher oil prices, higher excise taxes and the weak peso. High inflation negatively affected consumer companies last year by pushing up costs, which in turn pulled down margins. It also hurt consumer confidence, which in turn negatively affected sales.

However, inflation has been on a steady decline after hitting a peak in October last year. Earlier this month, the Philippine Statistics Authority (PSA) announced that inflation for the month of March eased to 3.3 percent. This brought inflation for the first three months of the year to 3.8 percent, well within the Bangko Sentral ng Pilipinas’ (BSP) long term target of 2 to 4 percent.
Except for transport and clothing and footwear, the increase in prices of all items in the consumer basket decelerated in March, led by food and nonalcoholic beverages which saw inflation drop from 4.7 percent in February to 3.4 percent in March.

Inflation is also expected to remain benign moving forward given the passage of the rice tariffication law, the more stable peso and lower commodity prices resulting from the slowdown in the global economy.

Admittedly, most consumer stocks are already expensive since their favorable 2019 outlook is already priced in. However, there are still some smaller capitalized less liquid consumer stocks that are still reasonably priced.

Here are some:

Century Pacific Food, Inc. (CNPF). CNPF is the maker of market leading consumer food brands such as Century Tuna, Argentina Corned Beef and Birch Tree Milk. It also produces coconut products for foreign brands. From a peak price of P19.20, CNPF was sold down as higher tuna prices and rising raw material costs hurt margins and profits in 2017. Although margins have recovered as prices of tuna have gone down and 2018 profits already reached a new high, CNPF’s share price continues to trade well below its peak. Moreover, CNPF is trading at only 18.1x price to earnings ratio (P/E). This is despite expectations that profits would grow by a compounded annual growth rate of 13.4 percent in the next five years.

Max’s Group, Inc. (MAXS). MAXS operates restaurant chains such as Max’s Restaurant, Pancake House, Yellow Cab and Krispy Kreme. From its peak price of P34.80 in 2016, MAXS share price fell as operating profits deteriorated due to higher raw material and manpower costs. However, MAXS already started showing signs of a turnaround in the middle of last year as its new management team focused on improving efficiency both in its stores and in its backend operations. In fact, operating profits increased by 29.7 percent in 2018 after falling by 25 percent in 2017. Although MAXS share price has recovered from a low of P9.50, it still remains cheap, trading at only 15.3x P/E. This is despite expectations that profits would grow by a compounded annual growth rate of 17.4 percent in the next five years brought about by its successful efficiency enhancing initiatives and expansion.

Metro Retail Stores Group, Inc. (MRSGI). MRSGI is one of the biggest retailers in the Philippines with a market leading position in the Visayas through its Metro branded supermarkets, hypermarket and department stores. MRSGI’s core earnings should start normalizing in 2019 after falling in 2018 due to the fire incident in January which led to the closure of its flagship store in Metro Ayala Cebu. Note that the supermarket already reopened in December while its department store is scheduled to follow suit. The company has also successfully addressed issues, which hampered the expansion of its retail foot print in the past, allowing it to open eight new stores in 2019 from only seven during the past three years. Finally, valuations are very attractive with the stock trading at only 13.5x P/E. This is despite our expectation that profits would grow by a compounded annual growth rate of 21 percent over the next five years.

SSI Group, Inc. (SSI). After suffering from overexpansion that led to bloated inventory levels and high operating expenses, SSI finally completed its rationalization program last year and is now set to grow. Although gross margins fell in the earlier part of 2018 due to the weak peso, the worst is over as the peso has stabilized and the company increased selling prices to pass on higher costs. Finally, the stock is trading at only 10.5x P/E. This is despite its more efficient operations, steady expansion and the stability of the peso, which should allow core earnings to increase by a compounded annual growth rate of 12 percent over the next five years.