Fund manager Nick Train has built up a reputation for being one of the best in the business. A committed ‘quality’ investor, Train buys shares in companies with the intention of holding them for the very, very long term.
Unsurprisingly, the market always takes notice when he takes a new position. This is what happened last year when he bought soap maker and FTSE 250 member PZ Cussons (LSE: PZC).
Today, the shares are down over 6% following a trading update for the first quarter of its financial year. What on earth is wrong?
FTSE 250 recovery play
Actually, not all that much. Today, PZ reported a 23% rise in revenue to £158.1m in the three months to the end of August compared to the same period in 2019. Unsurprisingly, these results were partly driven by “strong demand” for its hygiene brands, such as Carex.
Growth in its European and the American markets was particularly strong. Collectively, revenue here grew by 49% to £61.5m, thanks to all that handwashing and sanitising we’ve been doing. That said, sales of its most recognisable brands, Imperial Leather and Original Source, declined.
Elsewhere, revenue from PZ’s Asia Pacific and Africa regions rose 9% and 4% at constant currency respectively. Signs that sales in important markets such as Australia and Nigeria were recovering was particularly encouraging.
No, PZ’s share price tumble appears to be down to the cautious tone of CEO Jonathan Myers.
Cautious tone
Commenting on today’s numbers, Myers said that PZ’s operating landscape “remains highly volatile” for three reasons.
First, many of the economies in which the company operates are either in, or shortly to be in, recession. Clearly, this could impact on consumption of the company’s products as people tighten the purse strings.
Second, the trajectory of the virus remains uncertain, thereby making it hard for the business to provide guidance on earnings.
Third, the markets in which PZ operates — personal healthcare and consumer goods — will continue to be highly competitive. No surprise there.
Taking all this into account, Myers expects “some adverse headwinds for the rest of the year.” Perhaps the share price drop makes sense after all.
So, are the shares a buy?
PZ Cussons was trading on 19 times forecast earnings before markets opened this morning. Whether this represents good value or not is tricky to say.
On the one hand, it’s possible that the psychological impact of the coronavirus will remain long after the bug is gone. This bodes well for the mid-cap given its self-proclaimed “clear leadership” of the UK hand sanitiser market.
I also like that PZ isn’t overly dependent on one region or country for sales and that it’s talked of making progress in reducing its debt burden.
On the other hand, you might argue that demand for its hygiene products is already reflected in the valuation and the emergence of a vaccine could mean a sharp reversal in sales.
Less committed, short-term traders may also be inclined to sell following news that the FTSE 250 member plans to increase investment in its brands over Q2.
Personally, I think there are far worse things to do with your money than buying PZ Cussons. However, if you don’t feel confident enough to do so right now, you could always opt for the LF Lindsell Train UK Equity Fund instead.
