One attribute I look for before deciding whether to invest in a particular stock, is longevity. Businesses that have survived multiple business cycles provide me with a degree of confidence. At the moment, I have my eye on a FTSE 250 stock that has fallen on hard times.
Currency devaluation
Tracing its roots back to 1884 in Nigeria, PZ Cussons (LSE:PZC) is a mid-sized consumer goods company, which owns a number of brands, most notably Imperial Leather.
Last week (7 February), the stock collapsed 20% when it reported a decline in revenues of £60m. The vast majority of this was attributable to the devaluation of the Nigerian Naira, the country being its biggest market.
To make matters worse, it cut the interim dividend 45%. This was in an attempt to protect earnings per share (EPS) cover and retain sufficient flexibility for investment growth opportunities.
A struggling business
With inflation running at 30%, the state of the Nigerian economy is clearly outside of its control. However, this is a company that has witnessed profit declines for many years.
Three years ago, it launched a strategy to transform the business. For me, its success has been patchy at best.
Its UK personal care business saw profit and margins increase during H1 FY24. But its Beauty division across most geographies continued to decline.
Its beauty products have market-leading positions. For example, St. Tropez is by some margin the market leader in prestige self-tanning in the US, with a 39% market share. So where has it all gone wrong?
I believe that it’s learnt the hard way that having a great strategy is useless if one can’t execute on it.
A consumer goods business relies on two critical factors. A great in-store presence and an innovation pipeline that brings ‘newness’ to its product offerings. Arguably, PZ Cussons has neither.
A bloated organisational structure and an inability to monitor and move stock keeping units (SKUs) throughout its distribution network to match consumer-driven demand are hampering its progress.
Maximum pessimism
I invest in a business not because of where it’s been, but where it could potentially be in the future. It’s the application of such thinking that enabled Warren Buffett to become such a successful investor.
One of the best times to consider investing in a company is at the point when most other market participants have thrown in the towel. That’s what the principles of value investing are all about.
Although too early to be certain, I’m starting to see the emergence of green shoots here. One initiative is a ramp up in artificial intelligence investment. It has created a dedicated AI hub to test out new toolkits. AI generated images could be a game-changer for an industry that relies so heavily on consumer recognition and brand connectivity.
PZ Cussons is a lot smaller than the likes of Unilever and Procter & Gamble. This should theoretically give it more agility in the marketplace.
It’s certainly a risky play, particularly given its 10-year history of share price declines. But I’m leaning towards opening up a small position at first and then re-assessing my investment thesis further down the line.
