Today’s update from PZ Cussons (LSE: PZC) was rather disappointing, with the manufacturer of consumer goods such as Imperial Leather and Original Source announcing a fall in both revenue and profit for the first half of the year.
In fact, pre-tax profit declined by 7.9% to £39.7 million, with revenue down by 10% to £386.7 million as a result of a mixture of business disposals and challenging trading conditions. For example, the devaluation of the naira in a key market for PZ Cussons, Nigeria, had a significant impact upon its figures, while the company estimates that pre-tax profit would have been flat on the prior year were it not for losses on the sale of operating divisions.
Diversification
While PZ is a well-diversified company, it remains heavily skewed towards Nigeria, with the country being the company’s biggest single market. This means that weakness in Nigeria, as has been seen in recent months, has a major impact on PZ Cussons’ top and bottom lines. Certainly, Nigeria has significant long-term growth potential but, in the short to medium term, political instability and a weak economy are hurting PZ Cussons and look set to continue to do so in the months ahead.
This situation compares markedly to the ones faced by other consumer goods companies such as Unilever (LSE: ULVR) (NYSE: UL.US), SABMiller (LSE: SAB) and Reckitt Benckiser (LSE: RB). Although they sell different products to PZ Cussons, they are still relevant consumer goods comparators and, when it comes to diversification, they offer investors a superior profile both in terms of geography and product offering.
This means that, while the impact of one country or region undergoing a challenging period has a major impact on PZ Cussons (as is the case with Nigeria), Unilever, Reckitt Benckiser and SABMiller should be better positioned to cope with such a problem due to their extremely wide geographic spread, thereby offering investors a lower risk earnings profile in the long run.
Looking Ahead
Of course, PZ Cussons does trade on a lower valuation than its larger peers, with it having a price to earnings (P/E) ratio of 18.3 versus 23.2 for Unilever, 21.2 for Reckitt Benckiser and 22.6 for SABMiller. However, the increased stability and diversification which the latter three companies have seems to warrant such a premium and, while PZ Cussons does undoubtedly have significant long term potential in its markets (including Nigeria) it would be of little surprise for its top and bottom lines (as well as its share price) to come under pressure in the short to medium term.
As a result, Unilever, Reckitt Benckiser and SABMiller seem to me to be worth buying ahead of PZ Cussons at the present time.