Procter, No Gamble & Potential Takeover Target

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

For investors that want to get into consumer goods, now may seem like the best time to do so with the economy improving and heading towards the shopping season. But I find that multiples are overly elevated against historical levels in several instances. The best investment opportunities in the space come from blue chip companies with solid economic moats and earnings trends. While a few may be takeover targets, I wouldn't get your hopes up in this challenging environment. Below, I review 3 consumer good stocks.

Why Procter & Gamble is A "Buy-And-Hold"

Over the last 5 years, P&G (NYSE: PG) has fallen 5.8% - performing roughly in-line with the S&P 500, but less than half of the volatility. Today, I find the stock to be quite expensive. It generated free cash flow of $12.9 billion in the TTM ending 3Q12, which is a rise from $9.7 billion in 1Q12, but well below the $17.7 billion high in 1Q10. So, the current yield is at 7.1% - not terrible, but not good either. Multiples are worse at a respective 21.7x and 15.4x past and forward earnings. While the company is forecasted to grow EPS by 8.9% annually over the next 5 years, the rate was only 1.9% during the last half decade--investors could thus be in for some negative surprises.

However, the company has actually beaten expectations in all of the last four quarters. In 3Q12, EPS of $1.06 came out 10.4% ahead of consensus. The decision to increase prices in order to offset the decline in volumes thus seems to have paid dividends. At the company's analyst meeting, P&G emphasized that their brands grant the company a pricing advantage in global markets with particularly strong growth expected for India. In addition, management announced that it expects to increase share repurchases by $2 billion in 2012 to $6 billion.

All things considered, I see P&G as an attractive long-term buy. Its leading dividend yield of 3.4% has a strong history: the company has been paying out distributions for around one century and two decades. Yes, you read that correctly: since 1890, dividends have been a hallmark of P&G. Over the last 56 years, dividends have increased. Sales per share, EPS, cash flow per share, and dividend per share have all consistently gone up over the last two decades. It is this kind of long-term success that makes P&G a compelling "buy-and-hold."

Clorox: A Potential Buyout Target, But Quite Risky

While Clorox's (NYSE: CLX) operations have been more challenged than Colgate (NYSE: CL) and P&G, analysts still appear to give the bleach maker the benefit of the doubt. Still, the Street now rates the stock a 2.9 out of 5 where "5" is a "sell." And although the stock trades at a respective 17.5x and 15.7x past and forward earnings--well below corresponding figures of 20.4x and 17.6x for Colgate--Clorox is near its 52-week high and nearly 20% above its 52-week low.

FCF trends have also been less than inspiring. Over the past 5 years, they have gone nowhere and hovered around a $500 million annual average. To put this into perspective, the company is currently worth $9.5 billion, so its average yield is around 5.3%. ROA has also gone nowhere and held steady around 12.3%. In the least quarter, volumes fell 1%, but the cost saving initiative helped expand gross margins 110 bps.

The best opportunity that I see going for Clorox going forward is an acquisition. Colgate is worth around $50 billion and could generate meaningful revenue and cost synergies from integrating the business. It has a history of buying businesses, like Unilever for nearly $1 billion last year. Carl Icahn, earlier this year, unsuccessfully tried to get the company to seek suitors. While the billionaire corporate raider is no longer active in the stock, it can still be a potential sale when the shopping season renews interest. However, I still encourage preferentially buying a safer peer, like Colgate, which has the economic moat to support itself during macro uncertainty. Colgate has also seen FCF rise dramatically from $1.8 billion by the need of $1.8 billion to $2.5 billion today.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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