Analysing 50 companies in the UK and continental Europe, Edison’s Consumer Watch Report predicts many are vulnerable to further share price downgrades.
International investor relations consultancy Edison Group has published an extensive report evaluating the state of the consumer sector in the UK and Continental Europe. The report, which examines 50 companies, warns many stocks in the consumer sector are yet to experience the full impact of the economic downturn.
With economies in the early stages of a downgrade cycle, the depth and length of the slowdown and potential impact on the subsector revenues remain difficult to predict. Given this, consensus revenue forecasts may be too optimistic, the report concludes.
With a quick recovery in the coming quarter unlikely, the team of analysts expect further downgrades to be compounded by ongoing inflation. Edison warns that because the cost structure of many consumer-facing enterprises are very vulnerable to the current inflationary headwinds, combined with labour shortages and rising property and energy costs cutting into profit margins, the market is facing a difficult road to recovery.
In the UK, Internet & direct marketing retail were the weakest performing sectors, with only two companies – Hostelworld (HSW) and Victoria Plumbing (VIC) – producing a positive share price return in Q222. Meanwhile, revenue estimates for MADE.com (MADE) and ASOS (ASC) fell by 22% and 15% respectively.
Edison attributes the relatively weak performances as a rational response by investors to the squeeze on consumer spending power, with less vital goods and services being the first to take a hit as the cost of living bites. Consumer staples will likely perform better than discretionary spend moving forward.
Data from Edison’s research showed that three of the staples’ sectors – tobacco, personal products and household products – all generated positive price returns of 9%, 6% and 5%, respectively, significantly ahead of the decline of 6% recorded by the FSTE All-Share index. In the tobacco sector, BAT Industries (BATS) and Imperial Brands (IMB) saw increased share prices as consensus estimates for CY22 revenue and earnings before interest and tax increased.
Russell Pointon, Director of Consumer at Edison Group, said: “Businesses in the consumer sector are currently facing the perfect storm of reduced demand and widespread inflation. Through a detailed analysis of companies both in the UK and Continental Europe, our Consumer Watch Report has cast doubt on the optimistic growth expectations for the majority of companies in the sector. Looking ahead, we can expect revenue upgrades to be significantly offset by cost pressures, as the macroeconomic situation continues to deteriorate.”
Neil Shah, Director of Research at Edison Group, added: “The consumer sector is a key part of the UK and Continental Europe’s post-pandemic economic recovery, and it is vital that investors are able to recognise the challenges ahead for the sector. Our research identified sub-sectors and companies in the consumer sector, which were less vulnerable to inflation shocks and were likely to be more robust and resilient during a recession. This should help investors as they assess their investments in consumer stocks and ensure that money is flowing to the businesses with the best chance of outperformance.”
