Earnings and Outlooks Wrap: Consumer Staples and Industrials

Summary

• We summarise some of the outlooks that consumer staples companies and industrials are posting as they announce 1Q earnings.
• Most companies were able to pass on higher costs to consumers. This more than offset any adverse impact from lower volumes.
• Food companies reported strong earnings due to people dining out and visiting entertainment venues. But no one (yet) has addressed the prospect that rising inflation may force people to curtail these activities.

Market Implications

• The big division in company outlooks is between those pessimistic about supply-chain and cost pressures due to the Ukraine crisis and China lockdowns, and those that simply are not addressing these issues head on.
• For now, earnings beats are driving equities. As earnings season runs its course, the cumulative weight of outlooks should become the bigger driver.

Introduction

Earnings will come thick and fast for another couple of weeks. We take a quick pulse on what has happened so far, focusing for now on consumer staples and industrials. Roughly half the companies in these sectors have reported, with consumer staples registering a cumulative EPS beat of 8.6% and industrials 10.5%.

Consumer Staples

Food Sector

Several companies in the food and beverage segment have reported, including Coca Cola (KO), PepsiCo (PEP), Constellation Brands (STZ), Archer-Daniels (ADM), Mondelez (MNDZ) and Lamb Weston (LM). 

All registered strong EPS beats. The key factors were continued demand for premium products, an ability to pass on rising costs, and more people dining out and visiting entertainment venues.

Interestingly, they all also expect strong growth in coming quarters.

That such strong consumer spending marked 1Q may be unsurprising. The more painful inflation only came in March, after the Ukrainian conflict drove energy and most food commodities much higher; these have only really hit consumers in the past month.

The surprising point is that these companies have expressed no caution about these trends slowing or reversing. Yet anecdotal evidence suggests people are cutting back or planning to. One survey found 42% of respondents will cut back on restaurant meals and 33% on entertainment. Other news articles report similar patterns.

There is a big disconnect here. And we think some of these companies may find themselves on the wrong side of it.

Consumer Products

Proctor and Gamble (PG) and Kimberly-Clark (KMB) also reported healthy EPS beats, reflecting ongoing demand for their products and an ability to pass on higher costs.

But both companies were cautious about consumers’ willingness to continue swallowing higher prices. To offset this, they are investing in their premium brands to improve and advertise them and preparing less expensive alternatives.

Industrials

The outlook for industrials is mixed. Many companies are reporting EPS beats and strong demand but ongoing concerns about supply chains and rising worries about China lockdowns. Some companies seem more sanguine about their outlook, but you wonder if they are hiding behind the cloak of uncertainty and simply not addressing potentially problematic issues for now.

General Electric (GE) – Posted EPS beat, but cut 2022 outlook due to supply chains issues, China, and raw material costs. Strong demand in aerospace but difficulty sourcing parts. Equity down 12%.

General Dynamics (GD) – EPS was $2.61 vs $2.50 expected. Aerospace (corporate jet) division and shipbuilding units strong. Company does not seem to anticipate problems later this year.

3M (MMM) – MMM, an industrial conglomerate that produces everything from consumer products to surgical supplies to electronics for autos, reported a solid EPS beat, but also a litany of supply-chain issues that are worsening due to the Ukrainian war and China lockdown.

United Parcel Service (UPS) – UPS is mostly upbeat. Package volume was down 3.4% in 1Q, but revenue per package jumped 9.4%. Commercial packages were up but more than offset by lower consumer volumes as people rely less on e-commerce. Operating margin grew from 12.9% to 13.6% YoY. Interestingly, the company had little to say about rising fuel costs and whether it can keep passing on higher costs.

General Motors (GM) – Posted large EPS beat ($2.09 vs $1.68 expected); says chip shortage is easing. GM is selling about 50,000 electric Bolts annually; expects to roll out a broader line of electric cars in mid-2023 and produce 2 million by 2025. However, Tesla is already producing more than 1 million electric cars annually. You wonder how much of the early-adopter premium GM will be able to capture.

Ford Motors (F) – Posted small EPS beat ($0.38 vs $-0.36 expected) as higher prices offset lower sales volume. Sees strong demand for autos, but severely hampered by chip shortage, and no clear visibility on when this eases.

Concluding Remarks

During the 4Q 2021 earnings season, many companies expected supply-chain and cost pressures to ease in 2022. No one saw the Russian invasion of Ukraine coming, even as Russia moved masses of troops to the Ukrainian border, let alone the impacts on supply-chains and commodity costs. And the China lockdowns were on few company radars. 

Given the timing of these latter events, they seem to have hardly impacted 1Q earnings. As noted, consumer staples companies had little difficulty passing through rising costs.

But a difference is emerging in company outlooks for coming quarters. For now, many company stocks are responding to earnings; as earnings season runs its course, the cumulative weight of outlooks should be the bigger driver.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.