Investing in the Coupon Nation
Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
During the recent stretch of economic uncertainty, a growing number people started to rely on coupons when they shopped.
This means people are looking for value -- and trying to cut budget corners everywhere they can. As customers look for value, they naturally gravitate toward certain companies that cater to cost-conscious customers. These companies will likely see a pickup in sales and market share. If they are careful to properly discount the products so that the additional sales compensate for the price breaks, these companies should also see a rise in earnings. Savvy investors can find stores and businesses that will benefit from this new value-oriented coupon culture. Can an investor take advantage of this trend?
In this post, I’ll take a look at some of the companies that will most likely benefit from the consumer-savvy shopping trend, including companies that produce products that coupon-clippers tend to favor, as well as companies that see a boost in revenue when customers are trying to find ways to save money. Because it’s very easy for companies to chase sales at the expense of revenue, we want to look at earnings and revenue performance over the past few years.
Finally, we’ll carefully weigh how these companies manage their earnings because firms that don’t manage price discounts tend take damage to their own bottom line.
Head and Shoulders above the rest?
The first pick for the coupon culture is Procter & Gamble (NYSE: PG). The company produces some of the world’s most recognized brands, like Head & Shoulders, Crest, and Gillette, and employs an all-out marketing juggernaut to make sure cost-conscious consumers pull their products from the shelves.
Revenue at Procter & Gamble has had its ups and downs over the past three years. In 2010, the company pulled in $79.57 billion and jumped the following year to $85.14 billion. The next year, revenue settled back to a little over $83 billion.
Earnings rocked back and forth, too, but with better results for the shareholder. In 2010, earnings-per-share (EPS) were tagged at $3.87, but dipped slightly to $3.56 in 2011. However, the latest figures -- for 2012 -- show robust earnings growth. The company reported an EPS of $4.61.
Experts are expecting Procter & Gamble to grow its earnings in double-digits in the next year. Experts are betting on earnings to be about $4.03 per share and are forecasting $4.33 in 2014.
The recent stutter step in earnings and revenue growth may be one reason the company has asked former Chief Executive Officer, A.G. Lafley, to come back. Let's see if he can restore the solid growth, because, as we'll see, he has competition.
Let’s take a look at Unilever (NYSE: UN). In a lot of ways, Unilever is a Procter & Gamble investor’s best frenemy. Sure, it’s competing in the same market as Procter & Gamble and it’s always poised to take market share from the consumer products giant, but Unilever makes sure its competitors bring its A-game all the time.
Like Procter & Gamble, it’s competing on a global stage, but American consumers -- and their coupon-clipping proclivities -- are still valued customers of Unilever products, such as Lipton tea, Degree antiperspirant, and Dove soap.
The latest figures only go back to mid-2012, but it’s earnings and revenue picture looks similar to its old anti-buddy Procter & Gamble. From 2009 to 2010, revenue dipped from $59 billion to $55.76 billion. At the mid-point of 2011, revenue was rebounding, already at $29 billion.
Likewise, earnings per share show a little bit of a bounce. The total in 2009 was $2.26, then falling to $1.88 in 2010. Halfway through 2011, the EPS, at $1.02, was already showing signs of recovery, each of the two first quarters bested the first two quarters of 2009 and 2010.
Analysts think that Unilever will grow at rates about equal to its competitor, Procter & Gamble. For December 2013, the earnings are expected to be $2.22 and that should increase to $2.41 the following year, for about a 8% increase.
Brush up on revenue
Colgate-Palmolive (NYSE: CL) doesn’t have quite the diverse product offerings as either Procter & Gamble or Unilever, but it knows how to market to thrifty consumers. Its concentration on certain product areas -- mostly oral and personal hygiene -- can actually be an advantage. It has far less iron in the fire than its larger competitors, allowing it to focus on building those product lines. At least, that’s how it’s supposed to work on the store shelves; let’s see if that strategy is working on the company’s bottom line.
The company has shown strong one-year, three-year and five-year revenue and EPS growth.
In 2010, total revenue was a little over $15.5 billion and then jumped to more than $16.7 billion in 2011. Revenue edged up a little the following year to $17.09 billion.
Remember, when you see earnings lag revenue, it might mean the company may be trying too hard to raise revenue at the expense of good cost control. Colgate-Palmolive shows that steady earnings follow steady revenue. In 2010, the EPS for Colgate-Palmolive was $2.24. That jumped to $2.50 in 2012 and ended up at $2.60 a year later. That’s very close to the company’s revenue growth.
Analysts are bullish on Colgate-Palmolive's ability to grow its earnings as the world economy shakes off its sluggish pattern. At the end of 2013, analysts see an EPS of $2.86 and $3.15 in 2014. That's a growth rate of 6.53% and 10.16%, respectively.
Don't discount the coupon nation
By examining revenue and earnings, we can see that the kings of the coupon nation seem to have their marketing machinery in sync with their money makers. If consumers continue to be money-conscious in the next months or years, we should see these companies turn economic uncertainty into economic opportunity.
The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.
Matt Swayne owns shares of Procter & Gamble. The Motley Fool recommends Procter & Gamble. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!