Play It Safe With These Fast-Moving Consumer Goods Companies

Includes: HRL, PF, PG, UL
by: Fusion Research

The fast-moving consumer goods, or FMCG, industry's growth has been phenomenal in the last couple of years. Many consider the industry recession-proof, mainly because people still need basic amenities even during economic downturns. Now that the economy is getting back on the track, and consumer whims are continuously changing, what are these companies doing to maintain their growth trajectory? Let's look at three FMCG companies and see how they maintain their growth momentum.

Changing consumer preference to healthy and low calorie food

Unilever (UL) is the second-largest player in the global ice cream market with 16% market share. It contributes 12.2% to company's total revenue. The global ice cream market is expected to grow 4.2% annually from 2012 to reach $66.9 billion in 2019. The growing demand for dairy products, increase in disposable income, and changing consumer appetite for packaged ice cream products, are propelling ice cream sales. Consumers are also shifting toward low calorie and healthy foods, thus Unilever has decided to undertake efforts to suit the changing consumer preference.

Besides offering low calorie ice creams Carte d'Or Light and Solero Exotic, it has also taken the initiative to label product information, such as fat and sugar on ice creams packs for diet-conscious consumers. It has also repackaged its ice cream brands into smaller sizes, which will help reduce high-calorie intake during consumption. This should increase ice cream sales from diet-conscious consumers. Through new products and repackaging, Unilever is expected to take its market share to 16.9% in 2013 and 17.1% in 2014.

Unilever is in divestment phase and is selling off its non-core food brands to focus on core food brands in its portfolio. Its core brands have high growth potential and contribute 37.1% to its earnings before interest, tax depreciation, and amortization, or EBITDA, highest among all segments. Unilever core food brands include Becel, Knorr, Blueband, etc. that are sold across the world.

According to Unilever CEO Paul Polman "The company would continue to sell non-core food products, and it would examine products with EUR 500m to EUR 700m in revenues that are not global businesses and do not have the potential for global expansion."

Therefore, company is focusing on brands that already have a global presence. Earlier this year, it sold the Skippy business to Hormel Foods (HRL) for approximately $700 million and recently, it has agreed to sell its Wish-Bone and Western brands for a combined value of $580 million to Pinnacle Foods (PF). The deal is under regulatory approval and is expected to close in the third quarter or fourth quarter of 2013. Furthermore, it is also planning to sell its snack brand Peperami. The combined sales of Skippy, Wish-Bone, and Western brands was $560 million in 2012. The cash from this deal will improve Unilever's liquidity position and will help it invest in high-growth brands in the future.

Both Procter & Gamble (PG) and Unilever are major players in the consumer goods market and have price-to-earnings of 20.67 and 18.57. These companies are still discounted in comparison to the industry P/E of 24.40 and present good investment opportunities for investors.

Pinnacle Foods is in the business of manufacturing and distribution of food products and is the leader in the frozen and non-frozen food segment in North America. It is acquiring Wish-Bone from Unilever to expand its product portfolio. The portfolio of Wish-Bone and Western includes a range of liquid and dry-mix salad dressing that had combined sales of $190 million in the U.S. in 2012. Pinnacle offers diverse recipe ideas for all meals and seasons, and this acquisition will strengthen its ability to offer recipe ideas and meal solutions. Wish-Bone will complement and add flavor to Pinnacle's recipes with its salad dressings. Pinnacle expects Wish-Bone will add $65 million to its EBITDA after full synergy realization. However, significant cost-synergy will happen from 2014 onwards, translating into greater earnings. Pinnacle is expected to increase its EPS to $0.35 in the third quarter of 2013, and $0.58 in the fourth quarter of 2013, in comparison to negative EPS of 0.28 in the second quarter of 2013.

Strategic planning for 2014

The Procter & Gamble has provided a guidance of 3%-4% organic sales growth in 2014 and adopted a strategic road map for achieving it. The strategies include emphasizing shareholder returns by concentrating on its most profitable brands. The fabric care and home care segment is the most profitable segment, contributing 26% to net earnings. It has launched new products in Tide, Ariel and Gillette brands, all part of fabric and home care segment, and it is planning to support these launches with increased marketing and improved customer service.

In addition, it plans to deliver cost savings in 2014 from a $10 billion productivity initiative taken in 2012. It has already exceeded $1.2 billion in savings in 2013 and now plans to achieve cost savings of $1.4 billion in 2014. It will do so through expanding its European operation in key areas and localizing production in developing countries. This will help the company eliminate logistic costs incurred to ship products in developing countries, and it will rev up European operations in profitable areas by concentrating only on larger countries. Through these strategies, Proctor & Gamble expects to achieve an aggressive 5%-7% EPS growth rate in fiscal year 2014.

It recently entered into license agreements with Stella McCartney and Alexander McQueen to manufacture and market new perfumes under their respective brands. Fragrances and perfumes lie in its beauty division, which accounts for 25% of Proctor & Gamble's total revenue. The global perfume and fragrance market will rise at an annual rate of 4.4% in the next three years to reach $26.5 billion in 2016. The company has a 14% market share in the global perfume and fragrance market and wants to take advantage of this growing market. Stella earlier had partnership with L'Oréal to sell its perfumes and had a global market share of 14%. Now that Procter & Gamble has an agreement with Stella, it expects to take L'Oréal's share, after the launch of the new perfumes.


All these companies are using strategies to capitalize on the improving economic conditions. Procter & Gamble's strategies continue into 2014, and it expects to achieve growth in sales as well as earnings. It has also signed an agreement with Stella McCartney and Alexander Queen to boosts its share in the fragrance market.

Unilever is launching new products to gain a higher share in the growing ice cream market. It is also divesting many non-core brands to concentrate on its high-growth brands. With the acquisition of Wish-Bone, Pinnacle will improve its product offering and increase its earnings in the coming years. Therefore, investors shouldn't ignore these three companies.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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