Today’s update from PZ Cussons (LSE: PZC) is rather disappointing. Certainly, the consumer goods company continues to deliver impressive performance in Europe and Asia, with profit being higher than in the comparative half year of 2013. However, challenging trading conditions in Nigeria have caused the company’s overall operating profit to decline by 4% versus the same period in 2013.
Looking ahead, PZ Cussons could experience further disappointment during the course of 2015. That’s because the macroeconomic environment in Nigeria, which is a key market for the company, is set to experience a period of uncertainty due to the February presidential elections and the scope for further volatility in the Nigerian currency. In addition, the effects of Ebola are still being felt and, although Nigeria has been declared Ebola-free, the disease is still affecting cross-border trade in West Africa.
Geographic Diversity
Clearly, PZ Cussons is experiencing a difficult period at the present time and its share price performance over the last three months is reflective of this, with it falling by around 15%. Of course, the key reason for the decline in the company’s operating profit is weakness in the Nigerian economy, which is PZ Cussons’ biggest single market. While an external factor, it could be argued that PZ Cussons is not as well diversified as other major consumer goods companies such as Unilever (LSE: ULVR) (NYSE: UL.US), Diageo (LSE: DGE) and SABMiller (LSE: SAB) and is, therefore, more prone to short term challenges than its larger peers.
While they are very much engaged in emerging markets, their global footprint appears to be more evenly spread than that of PZ Cussons and this means that weakness in one region can be offset by strength in another. This provides a relatively smoother earnings profile for the company, which is a big plus for investors.
Valuation
Despite its shares falling heavily of late, PZ Cussons still trades on a price to earnings (P/E) ratio of 17.2 which, relative to the FTSE 100’s rating of 15.1, seems rather high. However, when you consider that the company is forecast to increase its bottom line by 10% next year and has excellent long term growth potential in developing markets across the globe, it perhaps doesn’t seem like such a high price to pay.
That’s especially true when PZ Cussons is compared to the likes of Diageo, Unilever and SABMiller. While they all offer increased geographic diversity and, like PZ Cussons, have appealing portfolios of brands, they trade on P/E ratios of 20, 21 and 21.8 respectively. Furthermore, none of the three can match PZ Cussons’ growth forecasts for next year, with Diageo’s earnings set to be flat and Unilever and SABMiller expected to grow their bottom lines by 7% and 9% respectively in 2015.
Looking Ahead
While PZ Cussons has endured a challenging half-year, when currency fluctuations are excluded, its operating profit is flat versus the prior period. Certainly, the next six months could prove to be a highly volatile period and external factors such as the spread of Ebola and uncertainty in the macroeconomic outlook for Nigeria could hold back the company’s growth moving forward.
However, with a valuation that is considerably lower than its sector peers and growth forecasts that are higher, PZ Cussons could be worth buying at the present time. There may be more lumps and bumps ahead and it may not be as geographically well diversified as its peers, but for longer term investors its current valuation means that it could prove to be a highly profitable investment.
