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Consumer Staple Stocks Feel the Sweltering Heat of Inflation
Stock Analysis & Ideas

Consumer Staple Stocks Feel the Sweltering Heat of Inflation

Inflation is at an all-time high, with rates rising faster than they have in decades. As a result, costs on a variety of items, including necessities like food, are being driven higher.

Consumer staple companies, which sell items like food and cleaning supplies, are not immune to the consequences of inflation. These stocks, which had mostly escaped damage during the previous two years, are no longer safe-havens.

Inflation Statistics on the Rise

The Consumer Price Index (CPI), one of the most important gauges of economic inflation, has taken the wind out of investors’ sails. According to the most recent statistics, CPI rose 7.9% year-over-year in March, a four-decade high. Notably, cost pressures are expected to worsen further as a result of oil and commodity market disruptions brought on by the Ukraine crisis.

Inflation appears to be affecting many equities across multiple sectors and to some extent, damaging the economy.

Inflation Upsets Consumer Sentiment

Given the continuing rise in inflation levels, consumers are undoubtedly beginning to feel the effects of rising costs. Many consumers are finding it harder to meet their basic needs as prices rise faster than incomes.

Krishnakumar Davey, president of strategic analytics at IRI said that the consumer-staples market “has crossed a threshold.” He further added, “Consumers have been pinched for some time, they are observing that they are paying more and more, and they are beginning to drop some items from their basket because they can’t afford it.”

As a result, researchers and retailers argue that shoppers are purchasing fewer essentials in smaller quantities, moving to less expensive store-name brands, and searching the internet for savings. They believe that the shift is most visible among lower-income customers who overspent on household goods during the peak of the pandemic.

Here, we’ve compiled a list of two consumer staple equities that appear to be inflation-affected.

Kellogg’s (K)

Kellogg’s has the largest share in the market for breakfast cereals. Apart from that, it owns a number of well-known frozen food and snack businesses.

The food manufacturer is looking to grow its business through acquisitions and worldwide development. However, it is dealing with cost inflation, supply-chain interruptions, and a cereal business strike in the United States.

Inflationary effects are reflected in Kellogg’s fourth-quarter earnings. Revenues and profitability at Kellogg’s both fell from the year-ago quarter. Net sales dipped 1.3% to $3.42 billion year-over-year, while adjusted earnings slid 3.5% to $0.83 per share.

Furthermore, management anticipates supply-chain bottlenecks and shortages to persist at least through the first half of 2022, posing a risk to the company’s growth.

Furthermore, TipRanks’ Insider Trading tool shows that insider confidence in Kellogg’s is currently Negative, as corporate insiders sold shares worth $9.7 million in the last three months.

Turning to Wall Street, Kellogg’s stock earns a Hold consensus rating based on two Buys, six Holds, and two Sells. The average K price target of $67.80 implies just 3.1% upside potential.

Clorox (CLX)

Clorox is the second consumer staple name to be discussed. It has a market capitalization of $17.7 billion.

Demand for the company’s cleaning and disinfecting goods was at an all-time high during the early days of the pandemic, pushing its stock skyward. Things, however, have now changed. The stock has dropped 24% over the past year.

Clorox’s inflation-affected earnings report, released in the first week of February, revealed that the company’s once-thriving pandemic-driven business was now fighting to maintain its margins. Clorox’s net sales fell by 8% to $1.7 billion, and adjusted profits per share fell by 67%.

Furthermore, the company issued a shaky forward outlook, stating that cost challenges are expected to endure. Further, commodity pricing concerns appear to be a longer-term headwind for the company.

Also, on TipRanks, Clorox has received a Sell consensus recommendation from Wall Street analysts based on one Buy, three Holds, and nine Sells. The average CLX price target of $138.92 represents around 4% downside potential over the next 12 months.

Final Words

In a period of global uncertainty, when inflation has gripped almost every sector, Kellogg’s and Clorox stocks could be risky as rising material costs continue to weigh on their top and bottom lines.

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