With the recent strength of the U.S. dollar and the fear of a global recession, commodity prices have plunged over 50% in some cases, over the last few months. While this is hurting the majority of industrial and commodity based companies, there are some consumer staples and consumer goods companies whose raw costs are declining because of the decrease in commodity prices, which should lead to increased profit margins. Companies which may benefit the most from these lower commodity prices are: Kimberly-Clark Corp. (KMB), General Mills (GIS), Tyson Foods (TSN), and Goodyear Tire & Rubber Co. (GT).
Kimberly-Clark (KMB) manufactures and markets health and hygiene products worldwide. These products include children’s diapers, bathroom tissue, paper towels, and various other related household products. Some of their brand names include Huggies, Kleenex, Scott’s, and Kotex. Since diapers are made of approximately 30% plastic, oil is a main component in its production. In addition, the majority of Kimberly-Clark’s products are packaged in plastic. With oil prices down about 55% from their highs, Kimberly-Clark should see a dramatic drop in their raw costs leading to increased profit margins. Since Kimberly-Clark falls under the heading of a Consumer Staples stock, it should not feel any meaningful affects from an economic slowdown. Consumers will continue to buy their products during any economic condition.
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General Mills (GIS)
General Mills (GIS) manufactures and markets packaged consumer foods worldwide. Its products include cereals, yogurts, soups, frozen vegetables, and baking mixes. When it comes to commodities, most people think of oil, steel, copper, gold, and silver. However, one commodity not on most people’s radars that has decreased over the past few months is grain prices. Corn, soybean, and wheat prices are roughly 50% from their all-time highs reached earlier this year. Like other commodities, grain prices are levered to the U.S. dollar. As the U.S. dollar continues to strengthen, it gets more and more expensive for foreign purchasers to buy these products. Since most of General Mill’s products are made from grains, they should see drastic declines in their raw costs allowing them to lower the price of their products to meet international demand despite the rising U.S. dollar.
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Tyson Foods (TSN)
Tyson Foods (TSN), like General Mills, should benefit from lower grain prices, but for different reasons. Tyson Foods engages in the production, distribution, and marketing of chicken, beef, pork, and prepared foods worldwide. Since Tyson Foods breeds and raises their own chickens and cattle for processing their food, one of their main raw costs are grains for feeding these animals. Because of the increase in grain prices during 2007 and early 2008, Tyson Foods had to increase the price of their products to keep up their profit margins. Now that grains prices have come back down, Tyson Foods can lower their prices and still have good margins. Other food companies such as Pilgram’s Pride Corp (PPC) should also benefit from lower grain prices.
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Goodyear Tire & Rubber (GT)
Lastly, Goodyear Tire & Rubber (GT), which engages in the development, manufacturing, distribution, and sale of tires and related products and services worldwide should benefit from lower oil prices. Like plastic, one of the main components of rubber is oil. As oil prices continue to fall, Goodyear Tire & Rubber should see lower raw costs. Unfortunately, one of the main industries Goodyear supplies is the retail automotive industry. Goodyear Tire & Rubber may see lower raw costs because of the drop in oil prices, but they are also likely to see a drop in sales because of the lack of demand for automobiles. While Goodyear Tire and Rubber may face difficult times in the interim, long term this company is well positioned to excel in this industry.
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A stock options strategy for generating monthly income can be implemented for the companies benefiting from lower commodity prices. A covered call investing strategy can provide income, even if a company’s stock price remains stagnant. A covered call position can also provide a hedge in the event a stock’s price declines. Stock options can also be used to provide “stock insurance“, i.e., provide protection in the event a stock’s price drops significantly, put options and married puts, for example.
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