3 Consumer Goods Firms With Bearish Upside

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Includes: KMB, KO, PEP
by: Takeover Analyst

What follows is a list of firms in the consumer goods space that I find have limited room for appreciation. Of the three, Coca-Cola (NYSE:KO) is most preferred due to its strong brand name and excellent penetration in high-growth emerging markets. Kimberly Clark (NYSE:KMB) may be under pressure from greater competition, volatile raw material costs, and pension obligations, but this sets the foundation for higher risk-adjusted returns. It similarly has a strong brand and is led by management with deep-industry knowledge, backed and confirmed by the track record of innovation.

Coca-Cola

Coca-Cola is rated a "strong buy" on the Street and trades at a respective 18.7x and 15.4x past and forward earnings. It is currently valued at 100% of its historical 5-year average PE multiple.

Consensus estimates for Coca-Cola's EPS forecast that it will grow by 6.3% to $4.08 in 2012 and then by 9.8% and 10.3% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $4.45, the rough intrinsic value of the stock is $71.20, implying 3.1% upside. In order to counter PepsiCo's (NYSE:PEP) leading position in Middle East, Coca-Cola opened a half interest stake in Saudi Arabia's Aujan Industries. The company is likely to hike up advertising following solid momentum off of third quarter results.

Kimberly Clark

Kimberly Clark is rated near a "sell" on the Street and trades at a respective 17.9x and 12.9x past and forward earnings with a dividend yield of 3.9%. It is currently valued at 117% of its historical 5-year average PE multiple.

Consensus estimates for Kimberly Clark's EPS forecast that it will grow by 6.3% to $5.10 in 2012 and then by 8.6% and 6% in the following two years. Modeling a 3-year CAGR of 6.9% for EPS and then discounting backwards by a WACC of 9% yields a fair value figure of $72.51, implying 5.1% upside. The personal products company has taken initiatives to reduce its cost base and expand margins at the same time that it has strong growth opportunities in emerging markets.

PepsiCo

PepsiCo is rated a "hold" on the Street and trades at a respective 15.6x and 12.6x past and forward earnings with a dividend yield of 3.3%. It is currently valued at 88% of its historical 5-year average PE multiple.

Consensus estimates for PepsiCo's EPS forecast that it will decline by 7% to $4.09 in 2012 and then grow by 9% and 12% in the following two years. Modeling a 3-year CAGR of 4.4% for EPS and then discounting backwards by a WACC of 9% yields a fair value figure of $64.35, implying 2.7% upside. Global snack volumes gained 8% in the latest quarter. And although the firm is highly levered, its strong diversification mitigates much of the risk.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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