Exhibiting steady fundamentals and immunity to macro shocks, the food and beverage sector has had a bull run at the bourses this year. This is despite the fact that the sectors earnings on the whole have shown a definite slow-down at the tail-end of a three-year spell that saw food producers hog the limelight in the local manufacturing space.
The clear juxtaposition between the food manufacturers financials and the sectors rally at the stock exchanges has, however, become too pronounced to ignore. A recent research note sent out by Top Line Securities pointed out that a sample of 28 consumer stocks listed on the KSE had managed to generate a 90 percent return as of mid-December; dwarfing the 50 percent returns posted by the broader index during the same period.
And leading the pack amongst those 28 consumer stocks is a tight knit group of food and beverage producers, whose stocks have been enjoying heady multiples their financial performances cannot quite justify.
Take for instance Nestle Pakistan: The firms stocks gained 67 percent during the outgoing CY-a year that also saw Nestle becoming the second largest listed firm on the Karachi bourse with market cap touching $4 billion. However, Nestlés earnings have borne the impact of increased competition and a slowdown of consumer demand-so much so that in the quarter ending September, the firms bottom line saw a hefty 31 percent erosion year on year.
Rafhan Maize is another case in point. The firms stock price shot up by 111 percent during the year despite a largely depressed 2H CY13, which saw RMPLs net profits decline by another 7.5 percent at the end of the last quarter. In fact barring EFOODs, whose visible distribution struggles have been well documented within these pages, stock performance of almost every company in the accompanying table has largely outstripped its fundamentals during the outgoing CY!
This leads us to ask the unpleasant question: How long before the juice in consumer stock runs dry?
But, finding an answer to that query it turns out, is harder than one might imagine. For one, too many things have come together to make the sector as alluring as it has become and it will take some time before the hype unravels.
One may also expect that the overall good vibes attached with the highly visible firms in the sector will continue to drive consumer interest in the long term. And although it does not totally justify the costly territory the sectors stock has recently ventured into, it doesn hurt that food companies have provided superior returns despite trading at a premium all through the last two years.
Nonetheless, it is evident that the market, which is at an all time high, is ready for a bit of a corrective phase. At a time when almost all food manufacturers are toeing the line and passing off their spiraling costs on to consumers despite rising inflation, there might be a dry spell for food manufacturers just around the corner. If that happens, the market correction might just come sooner rather than later!
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CONSUMER STOCK PERFORMANCE INDICATORS
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Market Cap YTD P/E
(Rs bn) Return
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Nestle 342.39 69% 56
Rafhan 76.62 111% 38
Unilever Foods 57.27 117% 83
National Foods 23.16 63% 35
Mitchells 4.41 102% 40
Shezan 5.34 95% 22
Murree Brewery 9.21 206% 13
Engro Foods 80.32 7% 30
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Source: Company records, KhI Stocks.
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