U.S. consumer confidence in May jumped to its highest level since 2007, reflecting a rebounding housing market. This may add to spending in different sectors such as alcoholic beverages, household products, and tobacco. We will review one company for each one of these sectors. Each sector has different drivers that fuel growth, so let’s concentrate on each of them.
This consumer goods giant might out-perform the market
The Procter & Gamble Company (NYSE:PG) is the world’s largest consumer-products maker, with a market cap of around $211 billion. I like this sector as beauty and personal care sales may be rising to $446 billion this year, with a 3% CAGR through 2017, according to Euromonitor.
In addition, Reckitt Benckiser, the third-largest global home care products company (after The Procter & Gamble Company (NYSE:PG) and Unilever N.V. (ADR) (NYSE:UN)) forecasts a slight pick-up in global growth rates for the home care market.
On the other hand, The Procter & Gamble Company (NYSE:PG) is working to ameliorate its own performance.The company recently announced the return of A. G. Lafley as CEO to reignite growth, replacing Bob McDonald, who had succeeded him in 2009. The announcement was well received by the investment community and the stock price increased 4% after the announcement. The Procter & Gamble Company (NYSE:PG) is trading at a P/E of 18.79 times, while the industry average is 22.21 times and the median in the company’s history is 21.2 times. EBITDA margin is 21.6%, quite higher than the industry average of 17.8% and of the company’s own median of 17.9%.
Another interesting issue is that The Procter & Gamble Company (NYSE:PG) has the highest number of institutional holders among its peers (2,655 according to Bloomberg). If we see the price evolution, it seems that the company will go to test its 200 SMA and former cap level of $72.8. I would watch the stock closely to buy it as soon as it rises to those levels.
This tobacco company is trading at an attractive level
British American Tobacco PLC (ADR) (NYSEAMEX:BTI) is a manufacturer of cigarettes and tobacco products. According to Bloomberg, global tobacco sales showed 8% CAGR, led by the Asia-Pacific region. Sales for all major global tobacco segments increased from 2007-2011, led by smoking tobacco, followed by cigarettes, smokeless tobacco, and cigars.
For portfolios with no restrictions in specific industries and that are looking for income stocks, the tobacco industry is a suitable one to consider. In spite of being over-regulated and taxed, tobacco companies are growing, generating huge amounts of revenue, which are translated into cash and offer attractive dividend yields. For instance, according to the U.S. Office of National Statistics, 21% of adults were smokers in 2009, a figure that was unchanged from 2007, when many public smoking bans came into force.
The company’s dividend yield is at 3.9%, almost 70 bps less than its peers’ average. That said, British American Tobacco PLC (ADR) (NYSEAMEX:BTI)’s free cash flow steadily increased from almost $1.5 billion in 2000 to more than $3 billion in 2012.
Forward P/E is at 15.46 times, showing a discount from its peers’ average of 16.84 times. Trailing P/FCF is at 20.86 times versus its peers’ 33.58 times, while P/BV is 9.58 times versus 12.90 times. For the appropriate portfolios, I recommend a buy.
The king of beer
Anheuser-Busch InBev NV (ADR) (NYSE:BUD) is the world’s largest brewer, with production plants in Europe, the Americas, and Asia, and represents 37% of the world’s market share. For the past few years, the company has been showing stable operating results, a robust cash flow generation, and continuous expansion through renovations and innovations. It has also completed a $20.1 billion purchase of the 50% of Grupo Modelo it didn’t already own.
On the other hand, according to Bloomberg, U.S. beer sales have been growing at a tepid pace, 2.4% year-over-year during the four weeks ended May 19, versus its 3.3% year-over-year growth during the past 52 weeks. In particular, Anheuser-Busch InBev NV (ADR) (NYSE:BUD)’s flagship brands have been losing dollar market share in this last four-week period. Bud Light (the No. 1 U.S. brand) fell 80 bps and Budweiser slipped by 40 bps. This is bad news considering the biggest EBITDA generation is in North America (44%).
Concentrating on the relative valuation figures, both trailing and leading P/E show ABI is trading somewhat expensive at 21 times trailing earnings versus the industry average of 18.4. I don’t dislike this company, but I would wait for the price to adjust (if it ever does) in order to buy it.
To summarize, the three companies analyzed are interesting ones to watch closely. I would start increasing position in British American Tobacco for suitable portfolios, and I would pay attention to The Procter & Gamble Company (NYSE:PG)’s market movements to take the chance to buy. I would not go long on Anheuser-Busch InBev NV (ADR) (NYSE:BUD) right now, but I would hold the stock if I already had it in my portfolio.
Vanina Egea has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Consumer Goods Companies: Top 3 Players originally appeared on Fool.com and is written by Vanina Egea.
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