I’m a big fan of fast-moving consumer goods (FMCG) companies such as Unilever, British American Tobacco, and Diageo. They tend to deliver stable cash flow with limited exposure to the cyclical effects of the general economy.
Customers keep buying ‘essentials’ from such businesses however tough the economic times become. But it’s not just the consumable nature of the products that keeps people returning for more. A big part of the business model for these firms is the strength of the brands.
Fast-moving consumer goods and brand power
Over the years, the big FMCG companies have ploughed millions into creating brand awareness through advertising and other means. Or they’ve paid big bucks to buy established brands. And it’s worth it because as well as nurturing customer loyalty, established and loved brands enable companies to charge more for the product, which pushes up profit margins.
Unilever, for example, is achieving a decent-looking operating margin close to 17%. And premium alcoholic drinks supplier Diageo is doing even better at around 31% with British American Tobacco scoring a margin around 35%.
Meanwhile, small-cap operator McBride (LSE: MCB) manufactures domestic household and professional cleaning and hygiene products in a similar way that Unilever does. But the business model is different. McBride contract-manufactures private label products for supermarkets and other outlets to sell under their own names.
And it’s a much weaker, lower-margin set-up than we see with the branded FMCG giants. Indeed, McBride is struggling to achieve an operating margin of even 3%. And the poor economics of the business have bedevilled the firm for a long time. Profits have see-sawed up and down from year to year, revenue has remained static, and the share price has not been able to hang onto any gains it’s made – it always seems to drop back again.
Good news in today’s update
However, the shares are perky today on the release of a trading update covering the 12 months to 30 June 2020. The news is good. And the directors expect adjusted profit before tax for the year to be “ahead of current market consensus”.
Usually, statements like that are music to the ears of investors, and I reckon that’s why the shares are higher today. Previously, expectations were for profit before tax of £21.6m for the full year, so the company has beaten that. Although we don’t know by how much.
In a familiar tale for the company, revenues were down a bit. The coronavirus crisis boosted sales of some products such as hand sanitiser, while others declined to neutralise the gain. However, McBride managed to reduce its net debt by around 23% from the previous year, to $93m.
Last month the firm appointed a new chief executive. And change at the top can sometimes lead to new drive and initiatives to turn a business around. One area of potential is McBride’s “growing” portfolio its own “successful” brands within the household category, although the core business remains private label contract work. But McBride still has its overall poor economics, so, for the time being, I’d rather buy shares in Unilever, British American Tobacco, and Diageo.