Unilever plc vs PZ Cussons plc: Which Is The Better Emerging Markets Play?

Unilever (LSE: ULVR) (NYSE: UL.US) and PZ Cussons (LSE: PZC) are two great emerging market picks.  

On one hand, Unilever, the larger of the two companies, is a free cash flow giant producing £4bn of free cash flow during 2013. On the other, Cussons knows and understands the African market, having been present within the region for decades. 

Further, both Unilever and Cussons sell defensive, essential everyday products, which are found within households around the world. The essential nature of these products mean that customers continue to return over and over again to re-buy.

The two companies have many similar qualities, but which one is the better pick?

Africa

Cussons sells detergents, soaps and baby-care products around the world. The company’s product portfolio contains the likes of Imperial Leather, Carex and Original Source, world-renowned soap brands.

The company’s key markets are are Nigeria, Indonesia and Malaysia, which account for more than half of group sales. Approximately46% of profits come from European consumers.

Cussons’ basket of well-known and trusted brands gives the company a solid base from which it can drive growth. Management is currently looking to expand into new markets, which should increase economies of scale and widen profit margins. Two of the company’s newest growth ventures are a Nigerian palm oil joint venture, which  is already performing ahead of expectations, and Rafferty’s Garden. 

Rafferty’s Garden is a specialist baby food producer, acquired by Cussons last year. Rafferty’s is set to begin its international expansion this year and is undertaking a host of new product launches at the same time. 

Here in the UK, Cussons is focusing on refining its product offering to present a more appealing range to the big four supermarkets.

Looking for higher margins

Meanwhile, Unilever is currently going through a transition as management sell off non-core, low-margin and low-growth food brands, while diverting funds towards the company’s line of home care products.

This side of the business is actually growing much faster; organic sales of home care products expanded 8% during 2013. The recent sale of Ragu and Bertolli pasta sauce brands to a Japanese firm for $2bn are part of this strategic plan.

Just like Cussons, Unilever is planning to expand into new markets, Africa in particular. Additionally, the company recently increased its stake in Hindustan Unilever Limited; Unilever’s Indian subsidiary. India is one of the world’s largest consumer markets, so Unilever’s presence within the region is exciting. 

Valuation is key

Cussons and Unilever both have their attractive qualities but one thing separates them: their valuation.

You see, despite Unilever’s size, free cash flow and global diversification, the company trades at a lower valuation than Cussons. Specifically, Unilever currently trades at a forward P/E multiple of 20.4, compared to Cussons’ forward P/E of 21.2. 

Additionally, Unilever currently offers a dividend yield of 4.1%, compared to Cussons’ yield of 2.1%. After taking these figures into account, it would seem as if investors would be better off choosing Unilever for the company’s dividend.