3 Consumer Staples Stocks in Focus this Earnings Season - Earnings ESP

3 Consumer Staples Stocks in Focus this Earnings Season

Despite improvement in economic picture, job scenario and labor market conditions, many consumer staples companies are still underperforming owing to a sluggish consumer spending environment.

Companies are witnessing decelerating growth in the developed markets. Growth of these companies in emerging markets has also been impeded due to rapidly changing pricing policy, import controls in some emerging countries and political unrest in others. The ongoing currency fluctuations are also problematic, as a stronger dollar reduces the value of outside-U.S. sales and in turn limits growth.

Lackluster top-line growth, lower unit volumes as well as currency headwinds were a drag on the results of consumer staples companies in 2014 which led many of them to provide a weak outlook for 2015. In such a scenario, many consumer staples companies managed to increase their earnings solely with the help of cost controls, inorganic growth and share buybacks, which signals a lack of real growth.

Thus, it may be a good idea to look at some companies in the consumer staples sector that have the potential to beat earnings in their upcoming releases, despite continued slowdown in China, turmoil in Russia, sluggishness in Japan and a struggling Europe. These stocks remain well positioned in today's market environment and could provide an improved guidance as a result of the aforementioned trends.

The Way to Pick Right Stocks

Obviously, there are quite a few companies in the consumer staples space, so it may be difficult to pick the right stock for your portfolio. One way to narrow down the list of choices is by looking at stocks with a favorable Zacks Rank of #1 (Strong Buy), #2 (Buy) or #3 (Hold) - and a positive Earnings ESP .

Earnings ESP is our proprietary methodology to determine which stocks have the best chance to surprise in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. Our research shows that for stocks with this combination, the chance of positive earnings surprise is as high as 70%.

Here are three consumer staple stocks currently equipped with the right combination of elements to post an earnings beat:

Pilgrim's Pride Corp. ( PPC )

Pilgrim's Pride is a premium consumer goods company, owning a high brand value in the market. The company operates different types of chicken processing plants and also owns many food facilities in Mexico and Puerto Rico.

This meat processor has delivered positive surprises in three out of the last four quarters and has matched estimates in one quarter. Pilgrim's Pride Corporation's better-than-expected performance in the last reported third-quarter 2014 has made investors optimistic about the company's growth prospects. Estimates have also been revised upwards.

Presently, the company is making strategic attempts to generate greater economic surplus through organic and inorganic growth strategies. Further, the company is making concerted efforts to upgrade the value of its exports and enhance overall operational excellence. In the quarters ahead, Pilgrim's Pride Corporation expects to invest in projects with solid paybacks as well as benefit from growing demand for food products.

Pilgrim's Pride has a Zacks Rank #1 and an ESP of +11.11%. The company looks to report earnings on Feb 11.

Sysco Corp. ( SYY )

Sysco Corporation, through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice or food-away-from-home industry. This global food products maker and distributor is consistently showing improvement in sales driven by acquisitions and volume growth, despite currency headwinds and gross margin pressure. In fact, Sysco has posted positive surprises in the last four quarters.

Of late, this leading foodservice distributor from North America is rapidly expanding in Latin America, Canada, Ireland, Northern Ireland and the Bahamas, which is appealing. In addition, investors are looking forward to the completion of Sysco's acquisition deal with US Foods for $8.2 billion, as announced in Dec 2013. The deal, which is currently undergoing a regulatory review process by the Federal Trade Commission, if approved, will create one of the largest food companies in the country. The merger will give Sysco increased size and scale and will also provide significant cost savings opportunities.

Sysco has a Zacks Rank #2, while it has an ESP of +2.44%. The company is scheduled to report on Feb 2.

Reynolds American, Inc. ( RAI )

Cigarette maker Reynolds American boasts an impressive brand portfolio of tobacco products, which helps it to maintain strong business momentum and generate decent profit. Since the past many quarters, the company has been able to maintain a leading position in the Smokeable tobacco category with the Camel and Pall Mall brands, despite volume declines. In the smokeless category, the Grizzly and Natural American Spirit brands have also been gaining significant market share.

Investors also remain encouraged by Reynolds' increased investment in its e-cigarette brand called Vuse. The company accelerated the nationwide distribution of Vuse during the third quarter of 2014. The brand was made available in 70,000 outlets in November and will be expanded further in fiscal 2015.

The pending merger with Lorillard Inc. ( LO ) is also a matter of interest for investors. The acquisition, if it materializes, will consolidate the tobacco industry and bring in growth opportunities for Reynolds and generate significant cost synergies. Since they share virtually identical manufacturing and distribution processes, the combined entity should be able to shed a great deal of overlapping costs. This should boost earnings soon after the merger closes.

The merger, which is currently being reviewed by the Federal Trade Commission, is expected to close in the first half of 2015.

Reynolds American has a Zacks Rank #2, while it has an ESP of +1.15%. The company is expected to report on Feb 10.

Bottom Line

We therefore believe that investing in these companies, which have an earnings beat potential, should yield strong returns for your portfolio in the short term.

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PILGRIMS PRIDE (PPC): Free Stock Analysis Report

SYSCO CORP (SYY): Free Stock Analysis Report

REYNOLDS AMER (RAI): Free Stock Analysis Report

LORILLARD CO (LO): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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