3 Great Consumer Goods Stocks

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Procter & Gamble (NYSE: PG), the world’s largest consumer products maker, reported that fiscal first quarter income fell 7% on a stronger dollar and costs related to restructuring. However, the result has still beaten analyst predictions. The Cincinnati-based company reported declining global market share and in May hatched a plan to focus on its 40 top businesses, 20 biggest new products, and 10 most profitable emerging markets as it undergoes a cost cutting plan aimed at saving $10 billion by fiscal 2016.

Another facet of the cost cutting exercise is job cuts, which the company said were running ahead of schedule. The company has also created a new position called global productivity officer that will report to the CEO and monitor possibilities for cost cuts as consumer goods companies increasingly try to gain a larger market share.

Consumer goods companies are in a state of slow growth in developed countries, as markets are already pretty crowded. The key for Procter & Gamble and other companies in the same line, such as Kimberly Clark (NYSE: KMB) and Johnson & Johnson (NYSE: JNJ), could be to tap markets abroad.

However, this needs to be a balanced approach, as growth in Europe is slow and growth in China also stagnates. Recently, Kimberly Clark announced that it would pull out its Huggies brand and exit the diapers market in Europe. P&G has admitted to making some mistakes in emerging and developed markets. The company has admitted to missteps in balancing growth in emerging markets like China, which accounts for 30% of its revenue. The company has also made mistakes in pricing laundry and oral care products in the US and has had to reduce rates. P&G also suffered from supply chain problems, which saw the delay in the release of the Tide Pod.

Citi Investment Research analyst Wendy Nicholson says that P&G’s strategy is paying off. She said in note, “First quarter results boost our confidence in the full-year outlook for Procter & Gamble, and we consider this a good ‘checking of the box’ in the first stage of this turnaround story." She has kept her ‘buy’ rating on the stock.

Revenue for the company fell by 4% to $20.74 billion, while analysts were expecting $20.79 billion. The stronger dollar accounted for a revenue drop by six percentage points. For the fiscal second quarter, P&G predicts adjusted core earnings of $1.07 to $1.13 per share with revenue ranging from down 1% to up 1%, between $21.88 billion and $22.32 billion. Analysts expect net income of $1.09 on revenue of $21.76 billion.

There is a strong opportunity for consumer goods companies to grow, and markets are expanding. Emerging markets are showing a thirst for branded consumer goods as alternatives to local available products. A rising middle class in these countries push up demand for products all too familiar in the West, such as Tide, Ariel, and Gillette. The question is whether these companies can balance growth in emerging markets.

Another player in the same market, Kimberly Clark, reported increased profits but missed analyst expectations (the exact opposite of what happened with P&G). The fact that they are exiting the diaper market in Europe means that they have probably focused on areas that are more profitable for the product. KMB expects its 2012 earnings outlook in a range of $5.15 to $5.25 a share. The company previously reported an outlook range of $5.05 to $5.20.

A factor I like to keep an eye out for is the kind of dividend paid out to investors. P&G, Kimberly Clark, and Johnson & Johnson have all been handing out increasing dividends year-on-year to shareholders. Kimberly Clark has a dividend yield of 3.44%. Dividend patterns look quite healthy for all three of these companies.

In terms of revenue, P&G naturally dwarfs the other two; but what really convinces me is the P/E ratio. Kimberly Clark has a P/E ratio of 17.47 whereas P&G has a P/E of 19.36. While Johnson & Johnson is a company with sound fundamentals, a P/E of 23.22 where the industry average P/E ratio is at 19.79 is a little alarming.

The consumer goods sector has a lot of potential for growth with the foray into emerging markets. Now might be a good time for investors to be looking at this sector.


ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson, Kimberly-Clark, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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