Consumer goods companies are much loved by investors. The relatively stable demand for their products through the economic cycle and predictability of their cash flows makes them attractive investment propositions.
And the FTSE 100 offers investors plenty of choice, from tobacco (British American and Imperial) to alcohol (Diageo) to household and personal goods powerhouses Unilever (LSE: ULVR) (NYSE: UL.US) and Reckitt Benckiser (LSE: RB).
Tobacco and alcohol companies may not be to everyone’s taste, but Unilever and Reckitt have almost universal appeal. However, could it pay investors to look beyond this popular blue-chip pair to smaller industry peers PZ Cussons (LSE: PZC) and McBride (LSE: MCB)?
Unilever and Reckitt Benckiser are truly global businesses, thoroughly diversified geographically, and own many worldwide brands and trusted local names. Both companies’ products are found in around 200 countries, and no single market impacts significantly.
PZ Cussons also owns a number of familiar brands, including Imperial Leather and Carex. The company operates internationally, but not on the breadth and scale of Unilever and Reckitt. For example, Cussons’s original homeland, Nigeria, is its largest single market, providing the majority of the 44% of group revenue that comes from Africa.
Cussons has struggled for significant growth in Nigeria in the face of headwinds over the last few years, and the company reported within its annual results today that “disruption in the north, the Ebola outbreak, presidential elections and a significant currency devaluation have all contributed to a very difficult operating environment”.
Elsewhere, Cussons’ Asia segment currently consists principally of four countries –Australia, New Zealand, Indonesia and Thailand — while the Europe segment is basically the UK, Poland and Greece.
McBride is similar to Cussons in that it operates internationally, but in a limited number of countries compared with the sweeping geographical reach of Unilever and Reckitt. And McBride is different from all three of its peers in that it is focused not on brands, but on private label products for supermarkets.
The UK is McBride’s largest single market at 35% of revenue, and this exposure, combined with fierce competition in the UK supermarket sector, has been impacting group performance. In it’s last annual results, the company said it had suffered as a result of “prolonged branded promotional activity within the UK”.
McBride has embarked on a major restructuring of the UK business, and at the latest half-year said that the scope for the group to benefit from lower costs would be “tempered by the extent to which Private Label can hold or grow volumes against branded promotions”.
The table below shows some key numbers for the four companies.
|Forward P/E||Forward yield (%)||5-year average operating margin (%)||5-year average return on equity (%)||5-year share price (%)|
As you can see, Reckitt and Unilever have superior operating margins and returns on equity (ROE), reflecting their economies of scale, efficiency and the pricing power of their desirable brands.
Their shares have also performed well. However, that is less to do with earnings growth (which has been modest), and more to do with investor demand for these solid blue chips, which has driven their price-to-earnings (P/E) valuations up to what are now relatively high levels. As such, I see Reckitt and Unilever as “holds” at the current time, rather than “buys”.
What of Cussons and McBride? Well, dealing with McBride first, as you can see the operating margin is unimpressive and the ROE is lower than that of its peers. Furthermore, these efficiency measures have been trending down over the last five years. The numbers, together with McBride’s problems caused by branded promotional activities, only serve to emphasise the attractiveness of companies with powerful brands.
With its relatively low P/E and high yield, McBride may be worth a closer look for investors who are partial to restructuring recovery plays, but this low-margin business is not my idea of a buy-and-hold consumer goods stock.
Cussons, with its better margins, its brands and a decent enough ROE has more appeal. Being smaller than Reckitt and Unilever it has a lower base from which to grow, and the fact that it doesn’t have blanket geographical coverage means it can pick and choose which markets to expand into and when. Of course, Cussons has to make good decisions and execute on them, but growth opportunities are there. In time, expansion would reduce the influence of current largest market Nigeria and increasing economies of scale should feed through to rising margins and ROE.
Is Cussons a “buy” on a P/E of 19.5 and yield of 2.3%. Close, in my view, but I think I’d be looking for a dip in the shares.