One of the best strategies for part-time investors is to track successful hedge fund managers’ holdings and pick which stocks look the most promising. Investors who followed Bill Ackman into The Procter & Gamble Company (NYSE:PG) have already reaped large gains — the stock is up nearly 33% since the legendary investor announced his hedge fund owned 1% of shares outstanding.
However, despite the run-up in the stock price over the last year, Ackman has maintained his position in the company. The stock is less appealing than it was when it traded in the low-$60s per share, but it may still trade below intrinsic value.
Like many companies that own well-known brands, The Procter & Gamble Company (NYSE:PG) benefits from tremendous pricing power. Its brands are usually the best-known in their respective categories — Charmin, Gillette, and Pampers, to name a few. 25 of its brands gross over one billion dollars annually — more billion-dollar brands than any other company in the world.
The Procter & Gamble Company (NYSE:PG)’s brand recognition enables it to lead or dominate many of the markets in which it competes. Market leadership makes it imperative for retailers to carry the company’s products and give them prime shelf placement, making it more difficult for competitors to sell their products. This allows Procter & Gamble to earn ample and predictable free cash flow.
The chart below is illustrative of The Procter & Gamble Company (NYSE:PG)’s pricing power. Over the years, the company has earned high and relatively stable free cash flow margins similar to that of Colgate-Palmolive Company (NYSE:CL) and higher than that of Unilever plc (ADR) (NYSE:UL).
Colgate-Palmolive Company (NYSE:CL) and Unilever plc (ADR) (NYSE:UL) are just about the only companies that come close to matching Procter & Gamble’s consumer products brand portfolio. Despite being a much smaller company based on overall sales, Colgate-Palmolive Company (NYSE:CL) completely dominates its product markets; the company’s Colgate brand represents nearly half of all toothpaste sales, far outpacing The Procter & Gamble Company (NYSE:PG)’s Crest toothpaste brand.
Unilever plc (ADR) (NYSE:UL), on the other hand, earns lower free cash flow margins than the other two companies because its packaged food segment earns lower margins than its consumer products division. However, the scale of the company’s international distribution network, combined with strong brands (including Hellmann’s mayonnaise and Lipton teas), enable it to earn consistent margins year after year.