Consumer Staples_ 2025 Themes and Stock Ideas

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the Consumer Staples sector in Europe for the year 2025. The sector has experienced underperformance, and the elevated interest rate environment is expected to limit its appeal, making idiosyncratic stock calls crucial [1][2][9]. Core Themes and Stock Changes - Rating Changes: - Reckitt: Upgraded from Equal-weight to Overweight, new price target set at £55.00 from £46.00 [3][40]. - Diageo: Maintained Underweight rating, new price target increased to £22.40 from £22.00, now a Top Pick in Beverages [3][15]. - Haleon: Downgraded from Overweight to Equal-weight, price target adjusted to £4.10 from £4.00 [3][14]. - ABI: Maintained Overweight rating, price target decreased to €61.50 from €64.50 [3][15]. - Stock Preferences: - Reckitt is highlighted as a Top Pick in Household & Personal Care (HPC), while Diageo is noted as a Top Pick in Beverages [9][15]. Market Dynamics - The EU Staples sector is forecasted to see 4.5% EPS growth in 2025, compared to 4.8% for MSCI EU. The preference is for HPC/Tobacco over Beverages/Food due to structural and commodity pressures [9][11]. - The sector is trading at approximately 16x NTM P/E, which is considered cheap historically, but rising bond yields and soft sector organic sales growth (OSG) may keep valuations under pressure [9][11]. Economic and Competitive Landscape - The 2024 performance for EU consumer staples was poor, with major players like L'Oreal, Nestle, and Heineken near their 52-week lows. The sector derated by about 17 points compared to the broader market [10][11]. - The valuation gap between EU and US consumer staples has widened, with EU Staples trading at a 30% discount to US counterparts [10][11]. Risks and Challenges - Idiosyncratic Calls: The lack of homogeneity within sub-categories suggests a focus on individual stock performance rather than sector-wide trends [11][12]. - Commodity Costs: Rising prices for commodities like coffee and cocoa are expected to impact margins, particularly for food producers, making it difficult to pass on costs to consumers [17][18]. - Tariff Risks: Spirits companies face potential tariff risks, especially with imports, which could affect profitability [17][18]. Company-Specific Insights - Reckitt: Positioned for a transformation with expected +MSD% LFL growth and +HSD% EPS growth from 2025. The stock is trading at a 30% discount to Haleon and over 20% discount to long-term averages [40][49]. - Litigation Risks: Ongoing litigation related to infant formula could pose risks, with several trials scheduled through 2026 [51]. Conclusion - The Consumer Staples sector in Europe is navigating a challenging environment with idiosyncratic stock selection becoming increasingly important. Companies like Reckitt and Diageo are positioned for potential growth, while risks from commodity prices and tariffs remain significant [9][10][11].