One of the scariest things about this market downturn is that there doesn’t seem to be anywhere to hide. In most downturns there always seem to be at least a couple of safe havens for investors to put their money, such as pharmaceuticals or utilities which pay out great dividends.
Consumer products companies are also stocks that investors tend to favor during troubled times—people are always going to use soap, shave, brush their teeth and feed their families no matter what is happening in the broader economy.
This time, however, things are different. Pharmaceuticals appear to be universally hated as a group with blue chip companies like Pfizer (PFE) and Merck (MRK) sporting yields over 7% and 5%, respectively, and yet no one seems willing to buy them. Even utilities, much loved by certain classes of investors for their rich dividends and safety, are seeing investors flee their stocks with such notables as FPL Group (FPL) and Con Ed (ED) yielding close to 5% and 6%, respectively. (See also: “Merck: Buy or Avoid Like the Plague?" and "Profit From the Market Meltdown.")
Today, one of the world’s great consumer products companies, PepsiCo Inc. (PEP) announced that third quarter earnings fell short of analyst’s expectations by a couple of cents per share. Investors sold the stock hard, and PEP is down some 10% today.
Truly, there is nowhere to hide when Pepsi disappoints the Street.
PepsiCo got hit with a double whammy during its third quarter—a sluggish consumer and a rising dollar which has cut into profit from overseas. During the summer quarter, gasoline and food prices were at their peak leaving consumers to trim spending on things they could easily do without such as soda, chips and bottled water. (See also: "Consumer Shock: Spending Takes a Turn for the Worse.")
Of course PEP thrives on soda, chips and bottled water sales. No wonder the company disappointed. Consumers feel poorer and are avoiding the very products PEP sells.
Buying water is an easy target. PEP’s bottled water sales fell by double digits while sales of carbonated beverages in North America slid 3%. Overall, company profits fell nearly 10%. PepsiCo also said the recent surge in the dollar against other major currencies will reduce fourth quarter earnings by about 4 to 5 cents per share and trimmed its full year 2008 earnings per share forecast as a result. Also noticeably absent was any outlook for fiscal 2009.
In response to the difficult operating environment PEP said today it plans to cut 3,300 jobs and shutter six plants in an effort to save $1.2 billion over three years. It plans to plough those savings into reviving its U.S. soft drink sales, increase investments in developing markets and make selected investments to continue growing the global snacks business as well as accelerate global R&D initiatives to help secure its future innovation pipeline.
PepsiCo, like a lot of consumers is in "hunker down mode." CEO Indra Nooyi said it best though: "While we can’t control the macroeconomic situation, we can enhance PepsiCo’s operating agility to respond to the changing environment."
PepsiCo will be well positioned for resumed growth once the downturn is behind us, but for now I would avoid the stock as nobody yet knows just how deep the recession is going to be. Consumer products companies need a healthy consumer, and right now the consumer is sick.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
