Economic downturns can be excellent opportunities for large companies. If their smaller competitors cannot survive, they disappear from the competitive landscape; if they can, they are ripe for takeover. It is the job of a value investor to identify which companies are large enough to survive the hard times, but not so large that they will be unable to grow when things turn around. Let's look at these five cosumer-product companies, and see which are getting ready to turn around.
Colgate-Palmolive Company (CL): With a market capitalization of over $42.5 billion, consumer products giant CL is one of the largest players in a field predominated by giants. Its stock price is very stable, with a beta coefficient of .44; most of its major competitors are more volatile, with Procter & Gamble (PG) at .45, Estee-Lauder (EL) at 1.29, and Avon Products (AVP) at 1.69. Over 75% of its common shares are owned by institutional investors, showing the high level of confidence on the part of large investors. Its stock price of $88.06 per share is down from a high of $94.89 reached within the last few weeks, but price per share has been on a steady incline from a 52-week low of $74.86 (reached in January) and a three-year low of $56.05 some two years ago. With an ever-increasing dividend ($.58 per share, up from $.36 in 2007) and a muscular earning per share of 4.97, this is clearly a stock that will reward the long-term value investor, or the portfolio manager who is looking to hedge their riskier bets.
Kimberly Clark Corp (KMB): Another cosmetics giant, KMB's market capitalization of $27.31 billion reflects its considerable market presence. Its relatively high price to earnings ratio of 4.18 is comparable to those of its competitors, such as PG at 3.94 and Johnson & Johnson (JNJ) at 4.10. Its dividend yield of 4.05 is among the highest in its sector, beating The Clorox Company (CLX) at 3.69, PG at 3.34, and Inter Parfums (IPAR) at 1.81. A value investor might be troubled, however, at its relatively low return on average assets of only 9.02; while comparable to Monalisa Co. (SEO:O12690) at 9.43 or Saudi Paper Manufacturing (SAU:2300) at 8.51, it is dwarfed by JNJ at 13.50 and CL at 20.74. A valuable company with good cash flow, KMB is still not the dominant player in its field; this gives them nowhere to go but up in a good economy, and in a recession, nowhere to go but down. A wise investor would do well to hold their shares until the sector as a whole begins to improve.
Nu Skin Enterprises, Inc. (NUS): An up-and-coming cosmetics company with only $3.22 billion in market capitalization, NUS has fewer products and services than comparably capitalized competitors such as Herbalife (HLF) or Revlon (REV). This is reflected in its relatively low earnings per share of 2.19, as opposed to HLF at 3.10 or REV at 5.98. Its return on average assets of 16.58 is, though respectable, nothing to HLF 24.43 or USANA Health Sciences (USNA) at 27.90, or the exceptional REV at 34.77. This is reflected in its high price to earings ratio of 23.55, which is trumped in its sector only by EL at 30.02; all other stocks are better priced, with AVP and USNA leading the pack at 10.91 and 11.12 respectively. Its fair dividend yield of 1.26 is nothing to that put out by blue-chip competitors such as AVP at 5.16 or PG at 3.34, and even microcaps such as CCA Industries (CAW) trump it with a muscular dividend yield of 5.75. Its closing price of $51.61 per share is just off its 52-week high of $51.65, showing that consumer interest is strong; but this reflects less confidence than hope. Small-time players are always growing into big-time corporations, but they don't get there by competing with the big boys on their own turf. For the moment, NUS is a David versus many Goliaths – but without his slingshot.
Procter & Gamble (PG): Its market cap of over $173 billion makes it one of the largest companies in the world, and its high earnings per share of 3.94 shows it to be on of the most profitable companies across many sectors. Though it may be too big to fail, is PG too big to do much better? Its price to earnings ratio of 16.01 is not as attractive as that of competitors JNJ at 15.63 or TEVA at 12.16, with ZEP, Inc. (ZEP) at 19.47 and Church & Dwight Co. (CHD) at 22.28 giving it a close run for its money. Its dividend yield of 3.34 is lower than CLX at 3.69, JNJ at 3.58, and KMB at 4.05; and this ignores smaller companies like CAW who have to make up their riskier position with dividend yields as high as 5.75. It is trading at $63.03 at time of writing, near its 52-week high of $67.72, but also near its 52-week low of $57.56. This is a particularly involatile stock with a beta coefficient of only 0.46; it doesn't go down much, but it doesn't go up much either. The only investors who should put their money in PG are those who are completely adverse to risk. But in this economy, those investors might as well put their money in savings bonds.
Avon Products (AVP): Despite the lackluster economy, this sector leader is committed to maintaining its $.23 dividend. Where this money could otherwise be used to grow the company, AVP seems content with its current earnings per share of 1.70, giving it a front-running price to earnings ratio of 10.91. Yet investors are clearly hesitant about this strategy; shares of AVP common are trading at $18.52 at time of writing, near a 52-week low of $17.55 and down from a 52-week high of $31.60. But perhaps this reflects less of weakening consumer confidence than of investor difficulties. AVP is more than 86% investor owned; of all its competitors, only microcap Physicians Formula Holdings, Inc. (FACE) is less owned by private investors. With investing companies forced to sell stable stocks in order to cover riskier bets gone bust, companies like this are often undervalued. With exceptional return on average equity of over 40 points and the sector-leading dividend yield of 5.16, this is an example of a stock that is stable, profitable, and undervalued.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.