In the hurly-burly of the current commodities boom, consumer stocks have been elbowed aside. And with commodities stock prices skyrocketing, there has been reduced incentive to buy consumer stocks.

However, there is another reason for this: the reputation of consumer stocks as steady, defensive investments has suffered, mainly because of the uneven performance of the two consumer sectors — staples and discretionary.

These stocks include a variety of industries, such as auto parts, publishing and broadcasting, restaurants, apparel and specialty retailing. Consequently, there is great variability in performance among consumer companies, as the accompanying table shows. Profitability, however, is less of a variable in consumer industries.

The most notable example of uneven performance is Loblaw Cos. After years of steady, superior growth by the food retailer, a key holding in George Weston Ltd., its merchandising formula has sputtered.

North America’s two most significant stock indices — the Standard & Poor’s 500 in the U.S. and the S&P/TSX composite in Canada — divide the consumer universe into two parts. Consumer staples are industries regarded as “must shopping” by consumers in good times and bad. Consumer discretionary industries are just that — businesses that are more cyclical than the staples of food retailing, pharmacies and food and drink manufacturing.

Some significant factors:

> Market Performance. Given the recent consumer spending boom, it is no surprise that consumer discretionary stocks have performed better in the markets than those of staples.

Over the past three years, the S&P/TSX consumer discretionary subindex has risen 32% compared with a 10% rise in the consumer staples subindex. However, that spread has narrowed in the past 12 months, with consumer discretionary up 10% and consumer staples up 4%.

These results place the two consumer indices in the bottom four in performance among the 10 sectors in the S&P/TSX composite index.

> Earnings And Dividends. There has been a slowdown in consumer discretionary earnings growth. A year ago, earnings in this sector were gaining as much as 25% over 12 months, according to TSX data. But, in February, index earnings dropped below the previous year’s level. Helping to offset this has been stronger growth in dividends, which were recently up 54% in 12 months.

By contrast, consumer staples earnings have dropped from a year ago. Dividends are up a modest 14% in the same period.

These trends have produced a predictable result in dividend yield. The consumer discretionary subindex yield was recently 2.2%, which is more what it was in late 2005. Yield on the consumer staples subindex hovers at 1.6%, the highest it has been in six months.

Price/earnings multiples for both indices have been close to 20 in the past few months. This compares with the TSX composite’s
P/E, which is close to 16.

> Valuation. Because the consumer sectors include so many different industries, valuations vary widely. Nevertheless, the trend is the same as the overall market: investors are willing to pay a higher price for consumer stocks.

A basic valuation tool, the price/book value multiple demonstrates this. It also shows most consumer stocks trade at modest price/book value multiples. About half trade at 2.5 times book value or less.

Considering stocks historically have been bargains at about 1.5 times book value, this says even the underperforming consumer sectors carry some risk.

Note the low valuation for Magna International Inc., despite its fast growth — a reflection of the auto industry’s problems. By contrast, Shaw Communications Inc. trades at a high multiple of book value, thanks to its growth record and growth prospects.

> What A Dollar Buys. A company’s average per-share results in the recent past provide the basis for making a conservative estimate of potential future performance. Averages avoid focusing on a single unusual year in analysing a company and avoid the impact of a non-recurring situation or event.

Putting these figures on a common denominator enables an investor to make company-to-company comparisons of what a dollar of stock price will buy, which is derived by dividing per-share revenue by stock price.

The accompanying table shows key earnings items on this basis, using average data for fiscal years ending between 2004 and 2006.

> Growth. Again, using three-year average data for comparison provides a conservative means of measuring growth. In the accompanying table, recent three-year average data are compared with the preceding three-year average to obtain growth rates.

@page_break@More than anything else, these growth rate figures reveal the variations within the two broad consumer stock groups.

Companies new to the stock market, such as Tim Hortons Inc., do not have earlier data to make comparisons.

> Profitability. This is where variations in consumer stock performance are smaller. Average return on equity ranges between 10% and 20% for most companies. IE