Stock Analysis & Ideas

Outsmart Recession with These 4 Staple Stocks

The list of headwinds for equity investors has increased in 2022. Record high inflation, continued supply concerns, rising interest rates, geopolitical conflict, and the pandemic in the background point to a slowdown in the economy. 

Regardless of the economic situation, the demand for essentials like food, beverages, personal care, and cleaning products remains stable, thus making consumer staples stocks a safer investment amid turbulent times. Also, these companies can protect their margins amid inflation by passing on the cost to consumers. 

The recent batch of earnings confirms that top consumer staples companies are navigating the current challenges well. For context, Coca-Cola recently delivered impressive organic sales and managed to expand operating margins amid a challenging operating environment. Thanks to its stellar performance, Coca-Cola stock recently hit an all-time high of $67.20. 

Further, Procter & Gamble delivered solid organic sales growth of 10% during the most recent quarter, led by higher volumes and pricing. Meanwhile, confectionery and snack food giant Mondelez delivered solid organic revenues aided by higher pricing and volume growth.

Moreover, Costco is firing on all cylinders, reflected through its robust comparable sales growth. Also, it recently hiked its quarterly dividend by 9%. 

Let’s now take a look at these companies individually to ascertain why these consumer staples stocks look attractive in the current climate.

Coca-Cola (NYSE:KO)

Coca-Cola’s CEO, James Quincey, is confident of achieving the full-year guidance and delivering strong top-line growth in 2022. Quincey added that Coca-Cola is “well-equipped to win in all types of environments as we fuel strong top line momentum and create value for our stakeholders.”

Coca-Cola expects to deliver organic sales growth of 7-8% in 2022. Further, it projects adjusted EPS growth of 5-6% and free cash flow of approximately $10.5 billion. 

Evercore ISI analyst Robert Ottenstein stated, “We see a positive set-up for KO over the next 1-2 years as mobility recovers, commodity inflation (presumably) peaks, and recession-worried investors move into Staples.”

On TipRanks, KO stock has a Moderate Buy consensus rating based on 13 Buy and five Hold recommendations. Further, the average Coca-Cola price target of $70 implies 7.6% upside potential to current levels. Also, Coca-cola stock has a maximum Smart Score rating of 10 out of 10.

Procter & Gamble (NYSE:PG)

Due to the ongoing momentum in its business, Procter & Gamble raised its revenue growth forecast for FY22. PG now expects organic sales to increase by 6-7%. Moreover, it projects core EPS to increase by 3-6%. Also, Procter & Gamble plans to pay $8 billion in dividends and repurchase stocks worth about $10 billion in FY22. 

In response to PG’s recent quarterly performance, Jefferies analyst Kevin Grundy stated, “PG Remains a Core Staples Holding.” 

Grundy added, “With strong demand outlook, though partially offset by a tough cost environment, the durability of P&G’s business model, brand strength (evidenced by mkt share momentum), scale advantages, pricing power, and strong leadership were all evident in the qtr.”

On TipRanks, PG stock has a Moderate Buy consensus rating based on nine Buy and six Hold recommendations. Further, the average Procter & Gamble price target of $170.43 implies 6.7% upside potential to current levels. 

Costco (NASDAQ:COST)

Costco continues to post double-digit comparable sales growth regardless of inflation and supply-chain worries. Its value offerings and high membership renewal rates bode well for growth. 

Ivan Feinseth of Tigress Financial is bullish about COST stock and expects it to benefit from solid demand and membership growth.

Feinseth stated, “COST’s incredible merchandising and supply chain management capabilities combined with ongoing store growth and international expansion will continue to drive strong Business Performance trends.”

COST stock has a Strong Buy consensus rating based on 16 Buy and four Hold recommendations. Further, the average Costco price target of $608.50 implies 9.9% upside potential to current levels. Also, Costco stock has a maximum “Perfect 10” Smart Score rating.

Mondelez (NASDAQ:MDLZ)

Mondelez’s top line could benefit from additional pricing actions and higher volumes. Moreover, it announced the acquisition of Grupo Bimbo’s confectionery business – Ricolino – for $1.3 billion. 

In response to this, Mizuho Securities analyst John Baumgartner stated that Mexico is a “High-Priority” market and the acquisition of Ricolino “adds scale.” The analyst added that the deal “will double the size of MDLZ’s Mexico business and significantly accelerate capabilities.” 

Baumgartner, together with the rest of the Street, is bullish on MDLZ stock. Its Strong Buy consensus rating is based on 12 unanimous Buy recommendations. Further, the average Mondelez price target of $72.67 implies 13.5% upside potential to current levels. MDLZ stock also has a maximum Smart Score of 10 out of 10.

Bottom Line 

The momentum in their businesses is likely to sustain irrespective of the economic situation, implying that investors can expect these consumer staples companies to deliver profitable growth in the coming quarters and generate strong cash flows to support share buybacks and dividend payments. 

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