In my time as an investor I’ve found that it is often better to compromise on valuation than quality, and so today I’m taking a look at a few cracking growth shares from the consumer goods sector.
PZ Cussons (LSE: PZC), Unilever (LSE: ULVR) (NYSE: UL.US) and Reckitt Benckiser (LSE: RB) are all quality operations. They boast portfolios chock-full of trustworthy brands, command pricing power and have a global reach. They often form the stable centre of a portfolio by offering a blend of steady capital growth and dividend hikes.
Historically, they have all traded at a premium to the market and continue to do so today due to these amicable qualities, but which is better positioned to outperform in 2015?
Reckitt Benckiser
The biggest news for Reckitt Benckiser last year was the demerger of its pharmaceutical department. The newly formed Indivior is now a listed company on the stock exchange, and each Reckitt shareholder received one new-co share per Reckitt share held.
Of course, after contributing sales of $1.3bn in 2013, the loss of Reckitt Benckiser Pharmaceuticals affects Reckitt significantly.
For one, analysts at Exane BNP Parabis predict core margins to fall as Indivior leaves Reckitt with “stranded costs” they would have otherwise paid.
I estimate Reckitt would have reported earnings per share of £1.93 without Indivior this year. Using this figure, the company trades on an adjusted PE of 25. This seems extremely high considering CEO Rakesh Kapoor warned investors that this year’s growth would be at the low end of estimates at 4-5%.
Reckitt is a quality business but this valuation seems far too demanding for me!
PZ Cussons
PZ Cussons has had a bad couple of months when compared to Unilever and Reckitt, with its share price falling nearly 25% from its October high.
A third of last year’s operating profit came from Nigeria, a country dependent on oil revenues. A devaluation of the Naira would dampen any profits from the hugely influential country and threatens PZ Cusson’s 2015.
Presuming that operating profit in Nigeria could half in a worst case scenario, PZ Cussons would report an operating profit of £90m, more than enough to at least maintain the dividend through hard times.
Of course, this now leaves PZ Cussons looking more attractive from a valuation standpoint. It trades on a PE of 16 and yields 2.6%.
PZ Cussons has increased its dividend every year for 35 years, an incredible track record that reminds us exactly how important it can be to buy these high-quality companies during stock price weakness.
Unilever
Unilever has significantly less going on at the moment than Reckitt or PZ Cussons — and that’s okay. Big and boring can be beautiful for a long-term investor.
Indeed, it seems to be a case of “steady as she goes” for Unilever. The company has grown slightly slower than was expected after a slowdown in China saw sales from the region falling 20% in Q3 this year. In spite of this, underlying sales grew by 2.1% in the quarter, led by a barn-storming 12.4% rise in Latin-America.
The Unilever growth story is clearly not dead yet.
A 3.6% yield supports the stock valuation of 18x, which seems a bit high otherwise given the slower rates of growth expected in the short term.
I’d expect an investment in any of the above companies to come good in the long-term and you could certainly do worse than adding one of these stalwarts to your portfolio in 2015.
However, given that both Unilever and Reckitt Benckiser seem so fully valued, I would be most tempted to invest in PZ Cussons. I can’t predict the oil price, nor the valuation of the Naira going forward, but I trust in the quality brands of the company to drive growth far into the future and so the current poor market sentiment does not worry me.
