No appetite for big consumer goods? Try their suppliers

Feb 14 2014, 20:16 IST
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SummaryJP Morgan Cazenove estimates the European food ingredients sector on average will see 6 percent earnings growth in 2014...

As a slowdown in emerging markets takes the shine off shares in consumer goods makers like Nestle , Unilever, Danone and Procter & Gamble, hungry investors have been sampling more of the companies that supply them.

Scent and flavour makers such as Symrise, Givaudan and International Flavors & Fragrances, and food ingredient names like Glanbia and Kerry Group are attractive, analysts say, because they're more resistant to weak consumer spending and benefit from health and wellness trends forcing so many brands to modify their products.

"The companies in those segments have exposure to faster growing specialty areas, serve a wide range of customers (from top brands to white label) and constantly invest in new technology," Berenberg analysts said this month. They upgraded Germany's Symrise to "buy" and Switzerland's Givaudan to "hold".

JP Morgan Cazenove estimates the European food ingredients sector on average will see 6 percent earnings growth in 2014, while European food producers will see no growth.

Indeed, consumer staples stocks have been battered by currency devaluations and cooling demand in emerging markets and lingering economic malaise in Europe and the United States. Over the past 12 months, the top 25 global consumer staples stocks are still up 7.5 percent on average, but down 3.5 percent in the year to date, according to Reuters data.

By contrast, 2014 has favoured ingredients. At Thursday's close Kerry was up 3 percent, IFF 5 percent, Symrise 6 percent and Givaudan 9 percent.

Still, there are outliers. Lower European sugar prices are squeezing profits at German sugar company Suedzucker, while Britain's Tate & Lyle on Thursday forecast sharply lower prices for its Splenda sweetener due to competition from cheaper Chinese sucralose makers. Both companies' shares are down by double digits.

"There are some very, very good businesses in that space, but I don't think you can just bundle them all together, as you can see with Tate & Lyle," said Exane BNP Paribas analyst Jeff Stent. "If you take a stock like Kerry, we've been buyers of that stock for as long as we've been analysts at Exane."


In developed markets, makers of everything from beer to bread to bodywash have lost some ground to generic, white-label products. But for the ingredients makers, those brands are customers. And in less mature markets, the growing customer base is local manufacturers.

Kerry Group's deal to supply dairy ingredients to Chinese infant nutrition company Beingmate shows how the sector can benefit

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