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Consumer stocks in a bubble: report

February 17, 2014

Pakistan’s consumer sector is far more expensive than regional peers, while most consumer stocks are in a bubble, Elixir Securities said in a recent report.

“Elixir Securities is bullish on bank, ENP and IPP sectors. We feel that cement and textile stocks are largely trading at fair values. However, we firmly believe that most consumer stocks are in a bubble,” the report said.

The report added that while the overall market is trading at a price-to-earnings ratio (PER) of 10.4, the consumer sector is trading at a trailing PER of 44. This translates into a premium of 324% over and above the market multiple as compared to a historical average of 64%, it said.

“We believe this is a bubble. Pakistan’s consumer sector is far more expensive than regional peers including India, Vietnam, Indonesia and Nigeria,” stated Elixir’s report.

Pakistan’s consumer sector is trading at a premium of 324% to trailing PER of the market, while global peers are trading at a premium of 56%, it said. This premium is driven by recent surge in prices of consumer stocks, it added. Consumer stocks have posted an average return of 366% since Jan 2012 against a market return of 138%. That is they outperformed the benchmark index by a whopping 2.3 times.

Explaining why consumer stocks in Pakistan are trading at very high multiples relative to peer countries, it said the country’s consumer sector is currently trading at a trailing PER of 44.0 which is 54% higher than average consumer sector PER in Elixir’s sample of global markets.

Moreover, Pakistani market – at a trailing PER of 10.4– is trading at a steep discount of 20% to MSCI frontier market index and 43% discount to Elixir’s sample of peer countries, said the analyst report.

Consumers have better earnings growth but that does not justify such high multiples, the report said. Explaining, it said Pakistan’s consumer sector, like regional peers, have higher earnings growth than the broader market, justifying some premium in PER multiple (historical average 64%). But current premium of 324% is too high as compared to the regional average of 56%, it concluded.

Published in The Express Tribune, February 18th, 2014.

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Source: Express Tribune (Pakistan)

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