Inflation check: JPMorgan favors PepsiCo and Coca-Cola over Procter & Gamble and Clorox
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JPMorgan took a deep dive into the implications for household products stocks of raw materials inflation, supply chain disruption and elevated transportation costs.
A key conclusion from the firm is that it favors stocks with strong brand equity and solid market share positions, which together allow them to price against the cost pressures. Coca-Cola (KO), PepsiCo (PEP), Constellation Brands (STZ), Reynolds Consumer Products (REYN) make that list. Also highlighted, companies with high gross margin rates like beauty standouts Estee Lauder (EL), Olaplex Holdings (OLPX) and e.l.f. Beauty (ELF). Reopening stories like Coca-Cola (KO) and The Duckhorn Portfolio (NAPA) are also seen riding out the rough macro backdrop as they benefit from operating leverage diluting some of the fixed costs and having a generally better mix.
Stocks at risk of seeing raw materials exposure whack earnings further in the near term include Clorox (NYSE:CLX), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL). Those companies are seen at risk of feeling pressure from higher commodities, packaging and transportation costs that cannot be fully recouped via pricing actions.
JPMorgan also downgraded Procter & Gamble (NYSE:PG) due to the double whammy of rising costs and FX headwinds. Analyst Andrea Teixeira and team cut P&G to a Neutral rating from Overweight. "While we remain positive on P&Gâs ability to continue to gain share and benefit from reopening in its beauty, shaving, and deodorant categories, we are taking a pause and downgrading PG to Neutral given recent increase in costs, FX headwinds and potential downside risk to consensus," wrote Teixeira.
See Seeking Alpha Quant Ratings across the household products sector.