When Nick Train, referred to as ‘Britain’s Warren Buffett’, adds a new UK stock to his portfolios for the first time in nine years, I sit up and take notice. The stock in question is FTSE 250 consumer goods firm PZ Cussons (LSE: PZC) that he bought in late 2019.
PZ Cussons owns around 30 brands including Morning Fresh, Imperial Leather and Original Source. But it has been struggling for years now with declining financials, a stagnating dividend and a falling share price.
So, what is Nick Train seeing in this battered consumer goods company that the market is missing? Let’s take a closer look.
An atypical Nick Train purchase?
PZ Cussons is in a sector of the market where Nick Train invests heavily. He already owns shares in a number of consumer goods companies including Unilever, Reckitt Benckiser and Diageo.
But that is where the similarity seemingly ends. Train invests in companies that have generated lots of cash over long periods of time. He operates relatively concentrated portfolios of around 25 companies that display long-term growth potential.
However, revenues at PZ Cussons has been trending down for five years now slipping from £821m in 2016 to £689m last year. This mirrors falls in earnings and cash flow.
2020 is shaping up no better, and despite high demand for Carex hand wash and Imperial leather soap during the coronavirus pandemic, social distancing measures have reduced demand for products such as St Tropez self-tanning.
Is Nick Train betting on Nigeria?
Nigeria is a critical market for PZ Cussons. As its economy has struggled, Nigerians have had less income to spend. This has resulted in a drop in revenues at PZ Cussons’ personal care and home care divisions.
But Nigeria is a huge potential growth market and I believe it is this expansion that Nick Train is betting on. Recently, it was predicted that by the end of this century, Nigeria would be the world’s second most populous country. The population is young and growing fast and PZ Cussons has the number one and number two brands in the market. If the Nigerian economy starts to recover as well, we could see revenues increase significantly over the years.
Train may also view the depressed share price right now as an opportunity to take a long-term position at a bargain price. Unilever, Reckitt Benckiser and Diageo all have P/E ratios in the high teens to low 20 versus a P/E of 14 for PZ Cussons. While still not a bargain, this is significantly lower than both its historical average and the industry average.
With Jonathan Myers having joined the company in May as its new CEO, this could herald the start of a change of fortunes for PZ Cussons. Nick Train certainly believes so, but until that turnaround kicks in investors will be handsomely rewarded with a dividend of around 4.4% for their patience. I’d buy.