Will the consumer staples recovery continue?

After a tough ride in 2014, the consumer staple sector had a good start to 2015 on the back of moderate economic recovery, better job prospects, improved business and renewed optimism as a result of the housing recovery. Rising wages and cheaper fuel were the other positives.

With oil and natural gas prices subsiding, consumers are left with more disposable income. Commodity costs have in many cases stabilized. Consumers are also expecting lower inflation primarily due to lower gas prices. A decline in commodity prices may improve profit margins for certain staples companies.

However, the continued appreciation of the U.S. dollar relative to most foreign currencies will be a near-term headwind to the earnings of U.S.- based staples companies with significant international operations. Other risks include potential price wars, a competitive environment, slowdown in international markets (including continued slowdown in China), political turmoil in Russia, sluggishness in Japan and an unfavorable economic environment in Europe.

If we analyze the trend on a year-to-date basis, consumer staple stocks performed well at the beginning of the year compared with the S&P 500 as a whole. However, the current situation is just the opposite as the S&P 500 index is well above the consumer staple stocks index.

Industry players like McCormick & Co, Inc. (MKC), Energizer Holding, Inc. (ENR), General Mills, Inc. (GIS), Molson Coors Brewing Co. (TAP), Tyson Foods, Inc. (TSN) have posted positive earnings surprises of 9.4%, 14.5%, 4.5%, 7% and 2.7%, respectively, in their recently reported quarters. On the contrary, Monster Beverage Corporation (MNST) and Sysco Corp. (SYY) fell short of their respective Zacks Consensus Estimate, mainly due to currency headwinds.

Hopefully, the second half of the year will prove to be better for these companies with a strong rebound in earnings.

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