You know what's amazing? The disparity between the valuations of consumer products companies, companies such as General Mills (GIS), Procter & Gamble (PG), Pepsi (PEP) and Clorox (CLX), and companies such as Microsoft (MSFT) and Intel (INTC).
In the latter case, you have two 10% growers with excellent dividends and terrific balance sheets. They have pretty good visibility plus product innovation, whether for cellphones and security for Intel or Windows 8 and Xbox for Microsoft. They've got commodity costs under control, and they are heavily into developed countries. They have very little serious competition. They are safe and secure. They grow at roughly 10%, and yet they sell at 10x to 11x earnings.
But the consumer goods stocks? These once totally consistent companies have come up short now for some time. General Mills just missed the quarter big, citing competition and commodity costs. Procter & Gamble just announced a colossal restructuring, aiming to cut costs by $10 billion. It has to; it has lagged terribly. Pepsi underspent against Coca-Cola (KO), and it has lost share domestically. Clorox, despite some terrific innovation, struggles to stay one step ahead of the commodity posse.
Yet Procter, which grows earnings at about a 9% clip for the long term, sells at 16x earnings. Clorox has 10% long-term earnings growth and yet has a price-to-earnings ratio of 16. General Mills, which missed numbers and had an 8% long-term growth rate, gets a 16 multiple. Pepsi is giving you a plus-6 long-term growth rate and sports a 16 multiple. It would be one thing if they all had vastly superior dividends, but their yields are only slightly higher than Intel's and Microsoft's despite the much smaller growth rate.
I have long prized and praised the consumer goods stocks as terrific places for investors. I liked their consistency, which gave me a sleep-at-night factor that merited paying up for those earnings. I no longer believe they are worthy of that premium. In fact, I wonder if, ultimately, they could go the way of the major pharmaceutical stocks, which now have incredibly slow growth rates, many with no more than low single digits, like Merck (MRK) and Pfizer (PFE), both with 3.8% long-term growth rates and multiples that have shrunk typically to high single digits. Many stocks in the group have no growth at all. They trade as bonds, for heaven's sake, relying on that high dividend to keep them from going dramatically lower.
When I look at the presentations we just got from the packaged-goods group at their annual dog-and-pony show in Boca, I think we are going to have to start challenging assumptions about what we pay for this group. Fifteen to 16x earnings just doesn't seem right to me. Meanwhile, you can see why Microsoft and Intel keep inching higher. They are just too cheap compared with the stock competition, with fresh innovation being the norm to keep that growth rate humming.
You want a packaged goods stock. You need a catalyst, like a new acquisition that moves the needle. Think Kellogg (K), which ActionAlertsPlus.com is buying. Or think B&G Foods (BGS), which has become a serial booster of dividends. But you want to sleep at night? Maybe it is time to think about owning Intel or Microsoft, which offer a higher reward at, these days, a lower risk to earnings.
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