Consumer staples concerns lie in ‘lack of positive estimate revisions,’ analyst says

UBS U.S. Household and Personal Care Analyst Peter Grom joins Yahoo Finance Live to share insights into the consumer staples industry and its outlook.

Video transcript

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SEANA SMITH: More warning signs on the consumer coming from retail companies today. Lowe's and Kohl's both reiterating that 2023 is shaping up to be a challenging year. But there still might be some opportunities within consumer stocks. UBS out today, upgrading Procter & Gamel to buy, raising its price target to 1.63. We have the analyst behind that call. Pete Grom, UBS US Household and Personal Care Analyst, here with us. Pete, great to see you here. So you're bullish on Procter & Gamble now, making the case that the recent underperformance is unwarranted. Why?

PETER GROM: Yeah, first off, thank you so much for having me today. It's great to be here. So yes, we think the recent underperformance is a bit unwarranted. You know, first and foremost, some of the underperformance has been related to some of the unwind in some of the defensive sectors we've seen year to date, like consumer staples. But we think one of the bigger concerns has been around the lack of positive estimate revisions.

Positive estimate revisions have been a prerequisite for consumer staple stocks to work this year. And we think some of the concerns around Procter & Gamble and the lack of revisions are somewhat misplaced, as we think there's an inflection on the horizon looking out to fiscal '24. We see a path to strong mid-single digit organic revenue growth. This is predicated on, one, low single digit underlying consumption growth, as Procter has exposure to categories that are growing and geographies that are going to see higher per capita consumption.

We also see that there's room for shared gains, as the company's been able to do that over the past few years. We also think there's going to still be some room for pricing, albeit somewhat limited, through premiumization. And we also think idiosyncratic benefits like China reopening are also going to benefit. So Procter & Gamble kind of checks all these buckets. And we're kind of layering in a balanced approach in terms of gross margin expansion, but also reinvestment. We see a path to high single digit EPS growth looking out to next year.

DAVE BRIGGS: Peter, anything you see from Wal-Mart or Target, in terms of the consumer beginning to hold back a little bit and caution from their CEOs, give you a bit of caution on P&G and their pricing power?

PETER GROM: You know, it's a great question. You know, I think right now, Procter & Gamble operates in daily use categories. And in daily use categories, brands matter, performance matters. And so while list pricing might be harder to take as we move into the back half of the year this year, there's other revenue growth management drivers that companies are able to [INAUDIBLE] they can kind of take on here.

I mean, I think, first and foremost, it's just around innovation. If you provide a product that is going to provide a reason for the consumer to trade up, that is going to not only drive category growth and share gains, but it also provides stronger pricing or mix. So not necessarily any sort of signs right at this point that would point to the categories necessarily slowing or that the consumer is holding back, just given the daily use nature of these categories.

SEANA SMITH: Yeah, and, Pete, you've got a great look on the consumer with their coverage list here. You have PepsiCo, Boston Beer, Newell Brands, Monster Beverage, just to name a few. Of the weakness, though, that you are seeing, where is it?

PETER GROM: Discretionary items, appliances. So companies like Newell have seen much weaker performance. Even the Yetis of the world have seen weaker performance. These are products that-- or categories that saw outsized growth during the pandemic, both from a result of consumer behavior or people staying at home more, but as well as stimulus, right?

And so a lot of these categories maybe typically grew 2% to 3% per year. And from 2020 to 2021, they were seeing mid to high single digit growth. And the consumer is pulling back on purchases of these items, not only because of broader macro weaknesses, but also simply because there's just less need to purchase some of these appliances on an annual basis.

DAVE BRIGGS: But with Pepsi in their Q4, what we saw is largely the price hikes are what sustained the profits. But the volume and the demand seemed to fall. Is there a correlation there with P&G?

PETER GROM: I think more broadly, last-- pricings are moving up well above historical norms. You're talking, in certain cases, high single digit, low double digit price increases. And there are sticker shocks. The consumer is holding back in terms of the amount of product that they purchase. But what I would say is the elasticities are holding up better than we would have thought. So at the end of the day, I think the consumer-- and this was alluded to on your prior segment-- with unemployment still relatively low, the consumer is still in a pretty OK spot to absorb some of these price increases for some of these everyday use categories.

DAVE BRIGGS: All right, Peter Grom, really appreciate that. Good stuff. Thank you.