Today I am looking at the perks and problems facing household-goods goliaths Unilever (LSE: ULVR) and PZ Cussons (LSE: PZC).
Terrific emerging market exposure
For those seeking stocks with brilliant exposure to lucrative developing regions, one can do a lot worse than selecting either Unilever or PZ Cussons. This factor has not helped either business during the past few weeks, of course, as rising fears of an economic ‘hard landing’ in China have exacerbated concerns over consumer spending power in the entire South-East Asian region.
Still, for long-term investors I believe these companies should enjoy resplendent returns thanks to the galloping populations and improving wealth levels of these new power regions. Unilever’s pan-global presence sources 60% of total sales from emerging markets, while PZ Cussons’ operations are centred on Africa, Asia and Australasia.
High valuations attract the bears
But investors should bear in mind that both Unilever and PZ Cussons’ high P/E multiples make them prime candidates for another sell-off should market confidence sour again. The former has seen its stock price duck 12% since the corresponding point in August, while its industry peer has shed 13% of its value during the period.
Despite this recent weakness, however, Unilever still changes hands on an earnings multiple of 20.1 times, a little way above the generally-regarded barometer of 15 times that signals attractive value for money. PZ Cussons deals on an improved 17.2 times forward earnings, although this clearly remains expensive in terms of conventional metrics.
Great growth plays
However, it can be argued that both companies fully deserve this premium thanks to their terrific defensive qualities that prop up earnings even in times of severe macroeconomic pressure. Indeed, PZ Cussons is expected to see earnings advance 2% and 8% in the years ending May 2016 and 2017 respectively, while Unilever is forecast to print growth of 10% in 2015 and 7% in the following period.
Both companies can thank the formidable popularity of key brands for their solid earnings prospects, a factor that enables them to lift prices to compensate for moderating volume growth. Unilever can count on a wide selection of products to keep the bottom line expanding, like Axe deodorant and Lipton tea, while PZ Cussons boasts premier labels such as Carex soap and Yo drinks.
Online sector set to smack earnings?
But Goldman Sachs raised questions over the dominance of ‘mega brands’ like those mentioned above thanks to the galloping progress of e-commerce. The broker argued last month that the unlimited shelving space of the internet, and subsequent growth in the number of products retailers can offer, will significantly dent Unilever’s share in certain markets and consequently harm its medium-term earnings performance.
Although the issue is certainly one to keep an eye on, I for one believe that both Unilever and PZ Cussons’ record of innovation across their blue-chip labels should enable them to hurdle the threat of rising online commerce.