This article is a comparison amongst producers of some very commonly used products found in almost every household. Whether it's Tide, Colgate, Dettol or L'Oreal you use, this article talks about the giants behind these products which fall into the category of Fast Moving Consumer Goods (FMCGs). I will be comparing Procter & Gamble Co (PG), Colgate-Palmolive Company (CL), Reckitt Benckiser Group (OTCPK:RBGPF) and L'Oreal SA (OTCPK:LRLCY) on ground of their last quarter performance, their key financial metrics, and most importantly, their expected stock performance for the future.
Consumption of personal goods and healthcare products will inevitably rise as soon as real incomes rises and living standards improve. Thus, demand for products offered by these companies is evergreen. This also tells us about the prime focus of companies under review today - the emerging markets. Having a foothold and market share in developing economies is essential to having high growth.
EPS Growth (3 Year Avg)
Dividend Yield, %
Return on Equity, %
Data from Morningstar and Financial Visualizations on Feb 20, 2013
Procter & Gamble Co. is ranked #27 on Forbes' list of Most Innovative Companies. The company's financial statements paint a bleak picture with a negative EPS being the most obvious. Over the past three years, PG has been experiencing growing costs while results refused to roll in. As a result, the investors have suffered at the hands of what was once a greatly profiting stock. However, with a $10 billion cost saving program in order, plans to repurchase $5 billion of its stock and having Q4 2012 profits that managed to beat forecasts, the company looks to be on its way back up the list. Furthermore, compared to its peers, the largest company in this review also has the highest dividend yield. The company is fairly efficient at making a profit out of its resources and its ROE should be expected to jump up further after the cost cutting was introduced. The company has considerable debt, amounting to $21 million in long-term debt and $8.6 million in short-term debt. Compared to its competitors, this is a significant amount; however, PG is much larger than its competitors, which set off the debt/equity somewhat in its favor. Furthermore, with the company's aggressive marketing and business strategy, its increase in debt is not alarming as long as it can be paid off in the short run.
Colgate-Palmolive initiated a restructuring plan in 2012 that underwent a two phase process: the first was short-term while the other had lasted for four years which resulted in savings of $365-465 million for the company and helped it manage its debt. In general, a large amount of short-term debt is not an attractive feature for an investor. While the company's short-term debt has decreased since the past year, its long-term debt stands at an approximated $3 billion; a number which has not shown signs of decreasing over the past four years. Long-term debt does very little to build up equity as the interest payment does not allow the principal payment to be paid off. In its last quarter, 29% of the company's total sales were from Latin America while Asia and Europe contributed with 20% each. At $108.70, Colgate-Palmolive stock is the most expensive amongst its peers, quite considerably. However, the company also offers the best return on per dollar investment as it has an ROE which is well beyond its peers; perhaps this is the reason behind its ability to have a good EPS growth rate over the past three years and also a dividend yield of 2.25%. What is alarming for the company however, is its massive debt load which needs to be reduced and re-sized as soon as possible in order to ensure future growth and to minimize vulnerability.
For Reckitt Benckiser, Q4 2012 has been somewhat of a revelation as its results were boosted by acquisitions and an unusually flu-ridden U.S. in the final quarter. The company has also signed a $482 million licensing pact with Bristol-Myers Squibb (BMY) to sell over the counter medicines in Latin America. From the metric perspective, its P/E valuation shows that it is perhaps the most valued company among its competitors. Its high EPS growth rate over the past 3 years only helps it stand out more than the rest. Reckitt Benckiser's pharmaceutical products have a cyclical demand - which brings down production costs and maximizes profit. The company has no debt on its financial statements and has a respectable dividend yield which is outdone by most of its peers. The company is targeting net revenue growth of 5.0-6.0% for 2013. Furthermore, the acquisition of Schiff also allows it to open up to demand for vitamins, minerals and secure a place in the supplement markets.
L'Oreal SA is the world's largest cosmetics maker and is also seemingly doing very well as its net profit rose by 17.8% in 2012 on a year-on-year basis. To further complement the company's prowess in operation, it announced $669 million of share buyback and a proposition of increasing the dividend by 15%. The maker of Lancome creams and Garnier shampoo had a strong Q4 due to a sizeable growth in Northern America and in the Asia-Pacific region. Compared to the four companies in this review, L'Oreal seems to be least fairly valued of the four which should provide confidence to investors for a positive future. While it has no debt to worry about, it has the lowest ROE and a less than spectacular dividend yield that is being offered at the moment. There remains to be hope for the company's attractiveness as it continues to rise on the stock chart. Over the past year L'Oreal rose by 30%. The positive influence of emerging markets extends to the cosmetic segment as the company recorded more revenue from emerging markets than Western Europe or Northern America for the very first time.
Make or Break for Investors
All four companies have recorded a fairly positive Q4 2012 due to improvements seen in emerging markets. What becomes pivotal for choosing the right stock at such a point is the impact of decisions made today on the sales and profits of tomorrow. All of the above noted companies are in a stage of transition which makes this decision complicated. Changes bring risk and risk can bring profit. What minimizes the chances of your risk going wrong is the area over which it is spread; this chain of causation suggests that while it may take the largest company longer to apply the approved changes, these changes will also reap a greater reward. Procter & Gamble in this regard is the obvious choice.
Morningstar provided the following estimates for these stocks: Procter & Gamble - 4/7 buy, 2/7 hold, 1/7 underperform. Colgate-Palmolive - 5/7 hold, 1/7 underperform, 1/7 sell. Reckitt Benckiser - 1/11 buy, 1/11 outperform, 5/11 hold, 4/11 sell. L'Oreal SA - 2/5 buy, 1/5 underperform, 2/5 sell.
From the above noted companies, I believe Procter & Gamble has made the most important step forward toward regaining its lost vigor. Its different cost reduction programs and the wide array of product ranges make its market strategies extremely flexible, but at the same time, safe from market shocks. While it pursues to regain the market share by insisting on aggressive pricing and improved packaging, I believe that PG definitely has potential for getting investors to latch onto it right now. Reckitt Benckiser, Colgate-Palmolive and L'Oreal in a descending order, fail to match the product line superiority of PG which makes them less likely to be able to capitalize on market trends.