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Procter & Gamble (NYSE:PG) is a company that requires no introduction as many of its brands like Gillette, Crest, Tide, Duracell and Bounty are ubiquitous amongst consumer products.

Why have I chosen to write about a blue chip stock like P&G when I should be uncovering some hidden company that has an edge through the latest exotic technology? Large defensive stocks like P&G are very important for the health of a diversified portfolio, especially when there is uncertainty in the economy or the possibility of a recession. However the reason I decided to feature P&G was because of another trend that I have noticed over the last few months. Just as Eaton Corp (NYSE:ETN) was a proxy for increased activity in the aircraft parts sector, P&G is a proxy for a trend that I would like to call "the return of the baby boom."

While having coffee with a close friend a couple of weeks ago, she remarked that everyone seems to be having babies these days. This observation confirmed what I had been noticing over the last few months. Try walking past the baby diaper aisle at your neighborhood Target Store (substitute store of choice here) and you will know what I am talking about. The US Census Bureau has stated that the number of children aged 5 and under is expected to grow more than 10% over the next decade. Diapers are an excellent way to invest in this trend, as it is a product that has to be bought over and over again while at the same time fosters brand loyalty.

The two most recognizable brands of diapers are Pampers and Huggies. Pampers, a P&G brand, sells at a premium of almost 20% over Huggies. My first thought was that Huggies was probably the stronger and more recognized brand based on the number of ads I have seen over the years. Brand valuation is extremely difficult especially when you are comparing two strong brands. I decided to use a novel but highly unscientific tool to determine which brand was stronger. Plugging in both Pampers and Huggies into Google Trends brought up the following chart showing that the number of searches done for Pampers over the last few years far outnumber the number of searches done for Huggies. This obviously shows higher brand interest in Pampers and probably translates into higher sales for P&G.

[In this chart, Pampers = blue; Huggies = red. Click to enlarge.]
Pampers huggies comparison

The fact that Pampers sells for a premium above Huggies also means higher margins for P&G. Since Pampers probably contribute only a small portion of the company's overall sales, I checked the overall profit margin for P&G. Procter & Gamble has an impressive profit margin of 13.17% when compared to Kimberly-Clark's 8.67% profit margin and more than twice Unilever's (NYSE:UL) 6.68%. Apart from Pampers, P&G also owns 20 other "billion-dollar brands", brands like Always, Iams, Olay, Head and Shoulders, Pantene, Charmin and Downy that generate over a billion dollars in annual sales.

P&G is not very attractively valued as its P/E of 20.19 is above the average P/E of the S&P500 but with its strong brands, dividend yield of 2.2% and excellent free cash flow, the slight premium is justified. The only things that I do not like about P&G are its large debt load ($37.75 billion) and the stupendous amount of goodwill that it carries on its balance sheet. A large part of the $54.69 billion goodwill is on account of P&G's acquisition of Gillette for about $57 billion last year. However with net income of $2.2 billion last quarter, the debt load appears manageable.

If you are interested in pure play companies that could benefit from the return of the baby boom, you could consider Gymboree (NASDAQ:GYMB), Carter's (NYSE:CRI) LeapFrog Enterprises (NYSE:LF) or even Mothers Work (MWRK). I blogged about Mothers Work here and Catablast Media has a nice write-up about Gymboree on Seeking Alpha.

Competitors:

Unilever with its brands like Dove, Caress, Knorr (soups), Lipton, Slim-Fast and Vaseline is a strong competitor of P&G. Other well known competitors include Johnson & Johnson (NYSE:JNJ), Colgate-Palmolive (NYSE:CL) and Kimberly-Clark (NYSE:KMB), which makes the Huggies brand of diapers discussed above.

The Good:

* P&G is a large defensive stock with 21 "billion dollar brands" and an impressive profit margin of 13.17%.
* The Pampers brand could benefit from "the return of the baby boom".
* P&G generates a lot of free cash flow and has a dividend yield of 2.2% with a 50-year history of raising dividends.

The Bad:

* Procter & Gamble carries $54.69 billion of goodwill on its balance sheet primarily on account of its costly acquisition of Gillette.
* The balance sheet is highly leveraged with $37.75 billion in short-term and long-term debt.

The Numbers:

P/S = $2.89
Cash = $8.67 Billion
P/E = 20.19
Long Term Debt = $33.92 Billion

PG 1-yr chart:

PG 1-yr chart

Source: Procter & Gamble Profit From the 'Return of the Baby Boom'