European Consumer Staples
Reason for optimism despite weak Q3
Neutral on Consumer Staples but support possible through Q3 earnings: Despite a period of limited downward earnings revisions to Staples through Q2 results season and still less than the wider market, Staples stocks have struggled to make headway over the summer months. Absolute PEs are still high, BUT relative valuations are no-longer so stretched, while dividend yield support vs. bonds remains attractive. With the economic/political backdrop in Europe still uncertain, and if Staples positive relative earnings momentum continues through Q3 earnings, we believe the sector is set to hold, or even re-rate a little, through Q4. However, despite period discussions and ‘Nifty 50’ type comparisons, we still find it hard to argue for a further structural re-rating without moving to a structurally lower long term cost of capital. With this report we consolidate all stocks in European Beverages & Tobacco and European Food & HPC into one enlarged European Consumer Staples sector, and maintain our Neutral stance. As a result, we remove Unilever as a Top Pick (Food & HPC), and retain Imperial Brands as our Top Pick across European Consumer Staples.
--> FUNDAMENTAL PICKS: Imperial, PMI, Pernod Ricard, Rémy, Danone, Unilever