How Will A Prolonged Slowdown Affect FMCG Stocks?

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Fast Moving Consumer Goods (FMCG) companies (Unilever, Proctor & Gamble, Colgate-Polmolive and Kimberly-Clark) have benefited form global markets.  The demand for consumer products in emerging economies such as India, Brazil, China, South Africa and Russia has been increasing year on year due to rising per capita disposable income. These markets are expected to continue growing, albeit at a slower pace as they have become victims of rapid currency depreciation. Currency devaluation creates inflationary pressures which force consumers to reduce buying activity. In a recent article, we had discussed the major factors that are supporting Kimberly-Clark’s stock price amid a slowing emerging world. (Read: Here’s Why Kimberly-Clark Is Outperforming Other FMCG Majors)

In this article, we analyze how a prolonged slowdown would affect each of the Fast Moving Consumer Goods (FMCG) giants.

See Our Complete Analysis For Consumer Stocks Unilever | Procter & GambleColgate-Palmolive | Kimberly-Clark

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Assessing The Impact Of A Prolonged Slowdown On Consumer Staples Stocks

Unilever: The contribution of emerging markets to Unilever’s total revenue currently stands at close to 60%. Despite the deceleration in growth, emerging markets continue to grow faster than the developed world. This is one of the key reasons why Unilever intends to lift the revenue contribution of emerging markets to three-fourth by 2020. [1] The company has been shedding some of its food businesses in order to focus on home and personal care products. These two categories together generate half of the company’s total revenues and about 80% of its emerging market sales, and hence are most prone to emerging market volatility.

Unilever’s above-market global growth in the last few years has come on its rapidly expanding presence in the emerging markets. It achieves about 85% of its overall growth from these markets. [2] Therefore, Unilever’s growth could slow significantly should the emerging market slowdown continue.

Our price estimate of $44 for Unilever marks our valuation at a premium of about 10% to its market price.

Procter & Gamble: P&G’s products are usually priced at higher price points due to their premium quality. Therefore, they witness higher demand in the developed economies than the emerging ones. The company derives less than 40% of its revenues from emerging markets.

P&G is trying to enhance its presence in these markets as they continue to grow at much faster rates than developed economies. The company registered organic sales growth of 8% in its top ten developing markets in FY 2013 (fiscal year ends in June). [3] However, it also recently lowered its guidance for sales and earnings growth for FY 2014 (fiscal year ends in June) due to unfavorable exchange rate movements in many developing economies and policy changes by the Venezuelan government. We believe that a prolonged slowdown could hamper P&G’s expansion plans, and consequently its growth trajectory. (Read: P&G Lowers Sales And Profit Guidance On Currency Translation Woes)

Our price estimate of $70 for Procter & Gamble is at a discount of about 10% to the market price.

Colgate-Palmolive: Colgate-Palmolive derives more than half of its revenues from emerging markets such as Latin America, Africa and Asia. The company’s product portfolio in these countries is skewed towards oral care products, which generate more than 50% of total company sales. Colgate is also the oral care market leader in many of the emerging markets including, India and Brazil. [4] Emerging market growth is a strategic priority for the company and may not yield expected results if the slowdown stays for a long duration. [5]

Our price estimate of $59 for Colgate-Palmolive marks our valuation at a discount of over 5% to the stock’s market price.

Kimberly-Clark: Kimberly-Clark operates primarily in North America and Europe. Slowing growth and profits in these regions are pushing the company to hunt for international opportunities. Kimberly-Clark is currently pursuing strong expansion in Latin America. This is the primary factor driving sales growth for the company across segments. Kimberly-Clark is also going through a major restructuring operation, which involves exiting the diaper business in Europe and channelizing resources towards better growth opportunities such as the diaper market in China. [6] We think that Kimberly-Clark may go light on its expansion plans if the slowdown continues, thereby lowering sales growth.

Our price estimate of $112 for Kimberly-Clark is almost in line with its current market price.

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Notes:
  1. Emerging markets to generate 75% of Unilever sales by 2020, Live Mint, November 2012 []
  2. Emerging markets to generate 75% of Unilever sales by 2020, Live Mint, November 22, 2012 []
  3. Will an Emerging Market Slowdown Crush Consumer Staples Stocks?, The Motley Fool, October 5, 2013 []
  4. Colgate-Palmolive Q2 2013 Earnings Call, Seeking Alpha, July 25, 2013 []
  5. Will an Emerging Market Slowdown Crush Consumer Staples Stocks?, The Motley Fool, October 5, 2013 []
  6. Kimberly-Clark Announces Second Quarter 2013 Results, Kimberly-Clark Investor Relations, July 22, 2013 []