The Best Pick For Gains In Consumer Products?

By Maxwell Fisher - September 26, 2012 | Tickers: MMM, CL, JNJ, KMB, PG | 0 Comments

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Companies like Procter & Gamble (NYSE: PG), 3M (NYSE: MMM), Johnson & Johnson (NYSE: JNJ), Kimberly-Clark (NYSE: KMB), and Colgate-Palmolive (NYSE: CL) take ideas for new products and turn them into brands which are part of our everyday lives. This is a great way to make a profit, but a company’s products can become so numerous that they become unmanageable. What’s next for these companies, and how should investors approach them?

Clearly, there are differences between them in terms of being able to deliver returns on invested capital and earnings growth:

Procter & Gamble earnings have stagnated over the past five years and Johnson & Johnson’s earnings have declined slightly. Both of these firms have lower returns on invested capital on their peers. These lackluster performances could mean that these firms would be better off if their holdings were spun-off as into different companies.

These companies will be reviewed based on their valuations and their potential for management to unlock the value of each firm’s assets.

Procter & Gamble: Is The Sum Greater Than Its Parts?

Bill Ackman, an activist investor purchased a stake in Procter & Gamble earlier this year is likely putting pressure on Mr. McDonald to reverse the market share declines. Analyst Ali Dibadj noted that Procter & Gamble could consider breaking itself up into separate units if it cannot improve earnings by the end of the year. Based on 2013 earnings estimates, Procter & Gamble would have a market value a little over $208 billion in breakup, which is greater than the firm’s $178 billion market capitalization. It is also believed that simplifying the company by selling business units would help improve focus. Robert McDonald has stated that Procter & Gamble will cut back spending in smaller markets, and focus more on spaces where it lost the most market share. Ali Dibadj believes Procter & Gamble has a good strategy, but that the company’s current lack of success could be related to recently announced cost cuts, management strategies, or to the fact that the company stymieing complexity. Dibadj also stated that he believes that some investors may begin to lose patience with the company if it doesn't begin to show improvement within the next year. So far, over the last twelve months, Procter & Gamble's shares have dropped more than 6%.

It was recently announced that Pershing Square Capital Management, Ackman's legendary Hedge Fund, has purchased about $2 billion of Procter & Gamble shares. Bill Ackman’s Procter & Gamble stake is a credible threat that could agitate management and prove to be a catalyst for change in the company. Most recently, Mr. Ackman’s power as an activist investor was demonstrated in a victorious a proxy battle when he gained control of the board of directors at Canadian Pacific Railway (CPR). This win may allow him to focus his efforts on Procter & Gamble.

Johnson & Johnson Spinoffs

In the same industry, Johnson & Johnson is selling its Reach brand of dental products as part of its effort to prune the number of its brands. Reach toothbrushes sales were over $355 million worldwide in 2011, and Reach dental floss sales were more than $265 million worldwide, with about $55 million of that from North America. While this could be a good brand for Procter & Gamble to purchase, Johnson & Johnson have a history of avoiding their large rivals and usually select to sell to smaller companies or private equity firms. In 2011 Johnson & Johnson sold its Monistat and e.p.t brands to Insight Pharmaceuticals, a company owned by Swander Pace Capital, a private equity firm. It also sold St. Joseph's Aspirin to llex Consumer Products Group, and in 2010 sold Purell, hand sanitizer products to Gojo Industries.

Many in the investment community speculating as to what his plans are for the company. Analysts believe that many of Procter & Gamble's investors are frustrated over the fact that share prices have shown no growth over the past year, whereas competing companies like Kimberly-Clark and Colgate-Palmolive have both experienced growth of at least 19%. Mr. Ackman has remained quiet about his plans for Procter & Gamble, but he has a history of accumulating large amounts of shares in languishing firms and then pressuring them to make changes. At the moment, his stake in Procter & Gamble is only about 1% of its shares, which doesn't give him much power to push for changes. Only ray of hope would be support from investors who are already annoyed by Procter & Gamble.

Picking Stocks Based on Valuation

Consider the following financial numbers:

If these companies continue business as usual, 3M is the cheapest by the price-to-earnings ratio while being the analyst favorite for highest projected future growth. Also, with a low payout ratio, its dividend is the most stable.

Between Johnson & Johnson and Proctor and Gamble, the better pick to reap benefits from divestitures is Johnson & Johnson. It has a long history of dividend increases. Moreover, it is actually selling business unit, while there could be a long, drawn-out power struggle before Procter & Gamble’s management embraces spin-offs and divestitures.

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