Are PZ Cussons plc & McBride plc Better Value Than Unilever plc & Reckitt Benckiser Group Plc?

Should investors look beyond popular blue-chips Unilever plc (LON:ULVR) and Reckitt Benckiser Group Plc (LON:RB) to smaller companies PZ Cussons plc (LON:PZC) and McBride plc (LON:MCB)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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 (%)
Reckitt 25.0 2.1 25.1 20.5 +82
Unilever 22.0 3.0 14.1 21.5 +51
Cussons 19.5 2.3 13.6 14.7 0
McBride 11.5 4.6 3.9 13.0 -22

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »