FTSE 350: Household goods and food producers navigate fickle consumer spending

This was the case for Premier Foods (PFD) during the first half of its financial year to March 2018. Profit from its grocery division fell 8.5 per cent to £51.4m after promotional activity dragged down margins, which offset an uptick in sales. The dilemma made another appearance in the third quarter trading update, when Cadbury and Mr Kipling cake profits took a hit. By contrast, Aim-traded Finsbury Foods (FIF) is trying to scale back on promotions and has instead increased prices to help compensate for more expensive ingredients, the national living wage and weak sterling. Whether this strategy is working in an increasingly price-conscious society will be revealed by interim results in March.

For some consumer goods companies, the turbulence of 2017 is still causing concern. July’s cyber-attack at Reckitt Benckiser (RB.) left the group unable to invoice and ship some orders, meaning upcoming full-year sales figures are expected to be flat on last year. That said, the group’s acquisition of infant formula business Mead Johnson has completed earlier than expected and should help it expand geographically. Rumour has it that Reckitt could be interested in Pfizer’s consumer health business as it continues its transformation into a health and hygiene company. Analysts estimate that if it did buy Pfizer’s business, Reckitt would become the second-largest consumer health company in the world behind Johnson & Johnson.

A profit warning was not the ideal way for PZ Cussons (PZC) to end 2017. Management warned that operating profits in the first half of the current financial year would be around 10 per cent lower than the previous period as cautious consumer spending in the UK and lack of credit availability in Africa offset improved profitability in Australia and Indonesia. These tough trading conditions are likely to continue throughout 2018 due to a downbeat consumer spending outlook. But management is hoping that new products due to launch in the second half will mean that full-year results will be flat on the year before.

Meanwhile, Unilever (ULVR) ended last year with the sale of its spreads business to private equity firm KKR. This looks like a sensible move for the consumer goods giant: during the first three quarters sales were up 3.1 per cent, but strip out the spreads business and turnover improved 3.5 per cent. Any net cash from the €6.83bn (£6.03bn) Unilever will bank on the sale will be returned to shareholders, unless management spies another acquisition target. The move to sell the spreads business was part of the new programme to accelerate value for shareholders by 2020, implemented after Kraft Heinz made an unsuccessful attempt to buy Unilever earlier in 2017.

<boxout: Favourites

We think Reckitt Benckiser could be due a recovery. This year’s cyber-attack was unfortunate, but we like how the company is distinguishing itself as a health and hygiene business, and it could be a real force to be reckoned with if it goes for Pfizer’s healthcare division. At 6,765p, the shares are trading at 20 times forward earnings, which looks cheap against its history. Another good bet is non-FTSE 350 constituent Finsbury Foods. At 113p, its 11 times forward price/earnings multiple is good value against the sector.

Outsiders

The profit warning from PZ Cussons makes us nervous about the year ahead for the consumer products company. It seems ambitious for management to think that new product launches could salvage the second half of its financial year if they’re already under pressure in all markets. A “seasonal uplift” in Africa may too be unlikely if consumer credit does not become more readily available. At 329p, or19 times forward earnings the shares are trading at a slight discount to their history, but we think they look cheap for a reason.<boxout>