US inflation running hotter-than-expected has led the benchmark indices to end the last week in the red. On top of it, the World Bank has warned of stagflation and slashed its global growth forecast. Amid this volatile situation, fundamentally solid stocks in the consumer defensive sector Kellogg (K), Kroger (KR), PriceSmart (PSMT), British American Tobacco (BTI), and Ambev (ABEV) might be solid buys.
Last week, the benchmark indices posted their worst weekly declines since late January. Losses became wide after the US inflation report came in hotter than expected. The consumer price index rose 8.6% from its year-ago value. On the last trading day, the Dow fell 4.6%, the S&P 500 declined 5.1%, and the tech-heavy Nasdaq Composite lost 5.6%.
Recently the World Bank warning that the global economy faces a stagflation risk, with sky-high prices coupled with low growth that is inching countries toward recession due to the ensuing war in Ukraine, China’s lockdowns, and the supply chain disruptions. The institution has cut down its global growth projections from 4.1% to 2.9% for this year.
Amid a challenging economic backdrop, consumers generally shift their spending away from non-essentials to daily necessities. Therefore, consumer defensive stocks usually hold well in such situations. Hence, the sector’s sturdy stocks, Kellogg Company (K), The Kroger Co. (KR), PriceSmart, Inc. (PSMT), British American Tobacco plcBTI), and Ambev SA (ABEV), which have outperformed the S&P 500’s 18.2% decline this year, might be solid buys now.
Kellogg Company (K)
K is a snacks and convenience foods seller that operates through the four broad segments of North America; Europe; Latin America; and Asia Middle East Africa. The company primarily offers crisps, crackers, ready-to-eat cereals, savory snacks, and cereal bars.
On May 18, K announced three new flavors of its Kellogg’s Frosted Flakes. Earlier in May, Snap Crackle and Pop introduced its Rice Krispies Treats HOMESTYLE Cinnamon Sugar. The new product offerings might add to the company’s revenue stream.
On April 29, K declared a dividend of $0.58 per share on its common stock, payable to shareholders on June 15. This reflects upon the company’s ability in cash generation and shareholder returns.
For the fiscal first quarter ended April 2, K’s net sales increased 2.5% year-over-year to $3.67 billion. Net income attributable to K rose 14.7% from the prior-year quarter to $422 million. EPS improved 15% from the same period the prior year to $1.23.
The consensus EPS estimate of $4.30 for the fiscal year 2023 indicates a 4.6% year-over-year increase. Likewise, the consensus revenue estimate for the same year of $14.86 billion reflects an improvement of 2% from the prior year. Moreover, K has an impressive surprise earnings history, as it has topped consensus estimates in each of the trailing four quarters.
The stock has gained 8% year-to-date and 16.3% over the past three months to close Friday’s trading session at $69.58.
K’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
K has a Stability and Quality grade of B. In the 86-stock Food Makers industry, it is ranked #22. The industry is rated B.
Click here to see the additional POWR Ratings for K (Growth, Value, Momentum, and Sentiment).
The Kroger Co. (KR)
KR is a retailer that operates a combination of food and drug stores, multi-department stores, marketplace stores, and price-impact warehouses. The company’s offerings also include manufactured and processed food products and fuel.
On June 8, KR announced that its Kroger Delivery service has started serving customers in South Florida through the opening of a new spokes facility in Miami. On May 25, the company added a spoke facility in Central Ohio for fulfilling customer orders in the area. These facilities should add to the operative capacity of the company.
KR’s sales increased 7.5% year-over-year to $33.05 billion in the fiscal fourth quarter of 2021. Adjusted net earnings attributable to KR came in at $686 million, up 8.9% from the prior-year quarter. Adjusted net earnings attributable to KR per common share improved 12.3% from the same period last year to $0.91.
Analysts expect KR’s EPS to increase 4.1% year-over-year to $3.83 in the fiscal year 2023. Likewise, Street expects revenue to rise 4.3% from the prior year to $143.84 billion for the same period. In addition, KR has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
KR’s stock has gained 32% over the past year and 12.9% year-to-date to close Friday’s trading session at $51.09.
It’s no surprise that KR has an overall A rating, which translates to Strong Buy in our POWR Rating system.
KR has an A grade for Growth and a B for Value, Sentiment, and Quality. It is ranked #4 out of the 37 stocks in the Grocery/Big Box Retailers industry. The industry is rated A.
To see the additional POWR Ratings for Momentum and Stability for KR, click here.
PriceSmart, Inc. (PSMT)
PSMT is an owner and operator of US-style membership shopping warehouse clubs. The company’s clubs offer brand name and private label consumer products, essential goods, fresh produce, and prepared foods, as well as providing other ancillary services.
On March 29, PSMT announced that it had purchased land in the El Poblado area in Medellín, Colombia, and had started construction of its second warehouse club in the area. This might improve the company’s operative capability.
For the fiscal second quarter ended February 28, PSMT’s total revenues increased 10.8% year-over-year to $1.04 billion. Net income attributable to PSMT and net income per share attributable to PSMT improved 11.4% and 12% from the prior-year period to $31.46 million and $1.03, respectively.
Street EPS estimate for the quarter ending August 2022 of $0.76 indicates a 20.6% year-over-year increase. Likewise, Street revenue estimate for the same quarter of $997.40 million reflects a rise of 9.7% from the prior-year quarter. Additionally, PSMT has beaten consensus EPS estimates in three out of the trailing four quarters.
The stock has gained marginally over the past six months to close Friday’s trading session at $72.45. It has declined about 1% year-to-date.
The POWR Ratings reflects PSMT’s promising prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system.
PSMT has a Growth, Stability, and Sentiment grade of B. It is ranked #16 in the Grocery/Big Box Retailers industry.
Click here to see the additional POWR Ratings for Value, Momentum, and Quality for PSMT.
British American Tobacco plc (BTI)
BTI operates as a worldwide provider of tobacco and nicotine products. The company’s offerings include vapour, tobacco heating, modern nicotine products, and traditional oral products. Headquartered in London, the United Kingdom, BTI sells its products under various brand names.
On May 12, BTI announced that its US indirect subsidiary RJ Reynolds Vapor Company had received Marketing Authorization from the US Food and Drug Administration (FDA) for certain Vuse Ciro and Vuse Vibe products. The authorization should allow the products to remain in the US market, which might benefit the company.
BTI’s profit from operations increased 2.7% year-over-year to £10.23 billion ($12.60 billion) in the fiscal year ended December 31. Profit for the year and EPS stood at £6.97 billion ($8.58 billion) and 295.60 pence, up 6.2% and 6% from the prior year.
Analysts expect BTI’s EPS for the next year (fiscal 2023) to come in at $5.06, indicating an 8.5% year-over-year growth. Likewise, Street revenue estimate for the same year of $34.53 billion reflects a rise of 4.3% from the prior year.
Over the past year, the stock has gained 8.2% and 15.9% year-to-date to close Friday’s trading session at $43.37.
BTI has an overall B rating, which translates to Buy in our POWR Rating system. The stock has a B grade for Stability and Sentiment. In the 10-stock Tobacco industry, it is ranked #4. The industry is rated A.
To see the additional POWR Ratings for Growth, Value, Momentum, and Quality for BTI, click here.
Ambev SA (ABEV)
ABEV, headquartered in Sao Paulo, Brazil, engages in producing, distributing, and selling beer, draft beer, non-alcoholic beverages, malt, and food products in the Americas. The company offers its products under different brand names, including Skol, Brahma, Antarctica, Brahva, Extra, Bud Light, Beck, Leffe, and Hoegaarden.
For the fiscal first quarter of 2022, ABEV’s net revenue increased 10.8% year-over-year to R$18.44 billion ($3.70 billion). Normalized profit improved 28.6% from the prior-year quarter to R$3.55 billion ($711.95 million), while normalized EPS came in at R$0.22, up 29.4% from the same period the prior year.
The consensus EPS estimate of $0.16 for the fiscal year 2022 indicates a 6.7% year-over-year increase. Likewise, the consensus revenue estimate for the same year of $16.31 billion reflects an improvement of 20.8% from the prior year.
ABEV’s shares have gained 2.7% over the past three months to close Friday’s trading session at $2.67. It has declined 4.6% year-to-date.
ABEV has an overall rating of B, which equates to Buy in our proprietary rating system. The stock has a Quality grade of B. It is ranked #10 out of the 36 stocks in the Beverages industry. The industry is rated B.
In addition to the POWR Rating grade we’ve stated above, one can see ABEV ratings for Growth, Value, Momentum, Stability, and Sentiment here.
K shares were trading at $69.29 per share on Monday morning, down $0.29 (-0.42%). Year-to-date, K has gained 9.43%, versus a -20.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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