One of the major challenges facing investors is accurately defining the relationship between risk and reward. Certainly, there are a number of companies that offer strong growth potential, and there are many others that are favourably priced. However, the risks posed by investing in a company may still be too great even though it trades at a discount to its peers, or has equally strong growth prospects.
While Reckitt Benckiser is undoubtedly a very high-quality company that offers investors the chance to part-own a number of supremely strong consumer brands, its growth potential simply does not measure up versus its sector peers. For example, it is forecast to grow its bottom line by just 3% this year, followed by growth of 7% next year. That’s below the wider market forecast and yet Reckitt Benckiser trades at a significant premium to both the wider index and to its two sector peers.
In fact, Reckitt Benckiser has a price to earnings (P/E) ratio of 24.9, which is much higher than the FTSE 100‘s P/E ratio of 16, as well as Unilever’s P/E ratio of 22.1 and PZ Cussons’ P/E ratio of 20.2. As such, it would be of little surprise for Reckitt Benckiser’s share price to come under pressure in the near term.
Meanwhile, Unilever and PZ Cussons both appear to deserve to trade at a premium to the FTSE 100. In Unilever’s case, it is expected to increase its bottom line by 10% this year, and by 8% next year. And, in PZ Cussons’ case, its earnings are all set to rise by 8% next year and 11% in the year after that. As such, both appear to offer growth at a reasonable price.
However, PZ Cussons doesn’t quite stack up as a business when compared to Unilever. Certainly, its trading update released today shows that it is on target to meet its full-year expectations, but its breadth and quality of brands is rather disappointing compared to that of Unilever. As such, it could be argued that Unilever should trade at a larger premium to PZ Cussons, given its superior brands.
Of course, PZ Cussons has dominant positions in a number of local markets – notably the UK, Greece, Nigeria and Australia, but it is not a truly global company in the same sense as Unilever is, since its exposure is local rather than worldwide. While this could be the next step for the company (i.e. expanding into new markets such as China), this will require significant investment that Unilever has already undertaken. As such, and while PZ Cussons does have potential, Unilever remains a better buy than both it and Reckitt Benckiser.
Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of PZ Cussons and Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.