Procter & Gamble vs. Unilever - Cramer's Mad Money (8/21/08)

Stocks discussed in the in-depth session of Jim Cramer’s Mad Money TV program, Thursday, August 21.

Profits at a Price - Heinz (HNZ), CSX (CSX)

You’d be hard-pressed to find an investor who wouldn’t want a 287% return. But it’s important to remember that profits like that come at a price. Compare Heinz and railroad operator CSX. Heinz reported a great quarter today thanks to its strong brands and growth overseas. Still, the stock climbed only 28 cents. That’s just how Heinz trades. And it’s this kind of dependable, consistent, slow growth that attracts certain types of investors. CSX, on the other hand, without any obvious catalyst, jumped $1.57, or 2.6% Thursday. Similar shifts in the market could just as easily have produced declines rather gains. “So before you buy a stock,” Cramer said, “you need to ask yourself what you can handle.” Do you want slow and steady, like Heinz’s 60% return over the past five years? Or would you rather the wild ride that comes with CSX but returns that 287%? Either way, only you know what’s best for your portfolio. So, as Cramer said, “You make the call.

Procter & Gamble (PG) vs. Unilever (UN)

We start with sector first when valuing a stock using Cramer’s 10-point rating system.

• The Soft Goods sector is a great business in which to invest during a slowing economy, especially when inflation has peaked and the companies’ costs are coming down. So both companies get five points right off the top because a sector is responsible for half of a stock’s worth.
• The next factor to consider is growth. Procter beat earnings estimates for the last quarter This company still expects 5% sales growth and earnings growth of 6% before interest and taxes, despite $3 billion more in higher commodity costs. Volume growth wasn’t great, but it still surprised analysts, who were bracing for the worst. Compare that with Unilever that reported in-line numbers and negative volume growth. Two points to Procter for this category. Score: 7-5, Procter.
• Then we consider how the two companies are positioned internationally. Unilever, a European company, brings in more sales from outside the U.S., and is in position to capitalize on a stronger dollar, as its American sales will translate into more euros. So Unilever gets a point here. Score: 7-6, Procter.
• Procter wins when you compare management teams, though. Unilever’s in the middle of a turnaround and we don’t know who the new CEO will be, while PG has CEO Alan Laffley and his strong track record and at least four more years of his stewardship before he reaches the mandatory retirement age. Two points for Procter here. Score: 9-7, Procter.
• The penultimate contrast is the ability to control costs. PG’s sales are double the size of Unilever and Procter has an 18% operating margin compared Unilever’s 13%. Plus, Procter’s a leader in practically all of its product categories, so it’s easier for the company to raise prices to deal with rising costs. Now that those costs are coming down, Procter makes even more money. One more point for Procter, bringing the final tally to 10-7, Procter.

Given the score, there’s no doubt that Procter is the better company. So you’d think at first glance that it makes the better investment. But the problem here is that the market knows PG is better. Just look at the multiples, which is the last thing you do before deciding between two stocks: Procter at $69.90 trades at 16.2 times 2009 earnings. Unilever at $28.25 trades at 13.7. Sure, PG deserves to trade at a premium to Unilever, but not that much, Cramer said. This is why price matters a bit more at times, especially with soft-goods companies. These stocks, unlike others, are actually cheaper when they drop in price. So Kimberly-Clark (KMB) at $62 might not make sense, but it does at $54. The same goes for Clorox (CLX) at $52.  So while Cramer said he still prefers Procter over Unilever, if only by a bit, if PG heads to its old high of $75 and Unilever to its old low of $26, he’d make a switch. 

Missing the Target – Target (TGT), Wal-Mart (WMT)

Forget about investing in Target, and turn your attention back to Wal-Mart, said Cramer. All the attributes that made Target such a great stock have faded while Wal-Mart is reclaiming its crown as the retailer to own right now. Cramer used rave about the store experience there, saying Wal-Mart didn’t compare. But that talk has been reversed of late, as Wal-Mart’s locations have become fun to visit. A trip to Target, on the other hand, seems to be more of a chore these days. Then there’s the growth story. Wal-Mart had definitely maxed out its U.S. presence while Target was just ramping up. But now it’s Target with no room left to grow in the States, just as Wal-Mart is gaining a larger share of markets overseas. Retail’s a touchy investment in this environment anyway, but when you take into account Target’s credit-card business, there’s an added risk here for investors. Delinquencies on Target cards are up to 6.7%, the highest in seven years. Wal-Mart’s also taken the lead in same-store sales, thanks to a focus on consumer necessities like groceries rather than just consumer wants. After all, people don’t stop eating when the market tanks. And that business is helping Wal-Mart. Wal-Mart has a better dividend (1.6% to 1.3%,), and the retailer is less exposed to those states hit hardest housing crisis. Right now Target is trading at a lower multiple than Wal-Mart, and as Cramer said, deservedly so.  He recommended investors consider dumping their target holdings for Wal-Mart. 

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Comments

[swaps:]

At least my UN shares are holding up and are still ahead of when I bought them two years ago, unlike other holdings in my over diversified portfolio.

Onthe other hand, when I look at local stores P&G has far more shelf space than UN. I assume UN is more dominant in Europe, which is a bigger market.

Dan

2008 Aug 23 10:49 AM