Europe consumer staples: what will drive earnings in 2017?

The European consumer staples sector has been characterized by slowing organic growth number, due to volume softness and pricing pressure, which has in turn contributed to its valuation de-rating, on top of sector rotation triggered since July 2016 by the rise in bond yields. What will be the drivers of earnings going forward ?

For some companies, such as Henkel, Beiersdorf or Reckitt Benckiser, the main drivers will be cost savings and efficiency measures. Consensus expects those companies to record 8% to 13% earnings growth in 2017 (respectively 10% for Henkel, 8% for Beiersdorf and 13% for Reckitt Benckiser).

FX impact should be more pronounced for UK based companies (RB should enjoy a 7.2% positive impact on 2017e revenue, according to consensus/Bank of America Merrill Lynch).

Those are positive. The only negative is the valuation. The sector still trades at a 39% premium to the European market. HPC has a 21.2x 2017 P/E ratio, compared with 15.3x for the market. This premium has slightly declined from its 55% 10Y average, yet, due to the sector rotation, the lack of organic top line/earnings growth might push this valuation premium further down, unless those companies can beat market expectations.

Their views on 2017 and comments on Q4 2016 earnings will shade some light on those questions.

BONUS: great table with tons of valuation/financial metrics for the main companies in the consumer staples world, both in Europe and the US.

Source: Bank of America Merrill Lynch


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