As Consumer goods stocks fall they become more expensive
It’s a Paradox only the stock market can conjure. Shares of consumer goods firms trading on the Nigerian Stock Exchange (NSE) have been in a free-fall for a while. Despite this they keep getting more expensive for potential buyers as earnings slide.
Investors have lost confidence in the Fast Moving Consumable Goods (FMCG) Industry as companies’ stocks continue to be beaten down, but a rebound in consumer spending could invigorate tepid earnings.
For close to a decade, firms were recording double digit revenue and profit growth and investors were willing to price in the growth in the valuation.
However, a precipitous drop in the price of crude oil prices in mid-2014 that tipped the country into its first recession in 25 years stoked a severe dollar scarcity that hindered retail and manufacturers from importing raw materials and equipment to produce goods.
While the introduction of a new foreign exchange policy in 2017 and a hike in key products added impetus to earnings in 2017/2018 financial year, the euphoria among shareholders was cut short by macroeconomic uncertainties.
Since the start of 2019, profit of companies has been shrinking, as analysts fret that earnings could go up in flames.
PZ Cussons Nigeria Plc, the maker of Lipton Tea, Imperial Leather Soap, is trading at a price to earnings ratios of 96.80 times, while shares closed at N5.50 on Friday as at 2:00 pm Lagos. Its shares price was at an all-time high of N35 as of June 12th of 2015.
Honeywell’s is trading at multiplies of 133.95 times earnings, while its shares which closed at N3.98 on May 2015, now trades at N0.98.
Unilever’s is trading at a price to earnings of 42.50 times, while its shares closed at N19.60 on Friday, but the highest it closed was at N62.20.
Nigerian Breweries’ has a price to earnings ratio of 21.70 times, as it shares closed at N46.50 as of Friday, this compares to N191 it traded in August 2017.
Nestle Nigeria has a price to earnings ratio of 18.47 times, while its shares closed at N1150 as of Friday. It closed at N1615 April 2017.
Cadbury Nigeria is trading at 12.90 times earnings, while its shares closed at N9 as of Friday. It closed at N46.63 in August of 2014.
Flour Mills Nigeria has a price to earnings ratio of 11.82 times earnings, while it shares closed at N22.50 as of Friday.
However, Dangote Sugar’s stocks are attractive amid a beleaguered industry as it trades at 6.23 times earnings.
Analysts say there has to be a recovery in earnings growth for people to have confidence in the industry.
The price to earnings (P/E) multiples shows earnings have collapsed. The earnings growth must be very low, according Wale Okunrinboye, Head of Investment Research at Sigma Pensions.
The border closure by Federal Government has hindered companies from shipping their goods out and out of the country, as a proposed hike in consumption taxes are expected to damp consumer wallets.
This means the prognosis are negative, and shareholders may not receive bumper divined as companies are facing cash-flow crises.
With margins under pressure, and inability of firms to further pass on rising costs to consumer in form of higher prices, it will take the donkey passing through the eye of the needle for some of them to break even.