Why Consumer Products Companies Might Be Overvalued At Current Prices?

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Consumer products companies have long been thought of as a safe haven for investments as their growth is considered to be proportional to ever increasing population, especially in developing world. The rising middle class, which is expected to more than double to around 4.9 billion people in 2030 [1], has been an assuring factor for investors to cling on to these stocks. However, this might not be the best time to throw chips into these stocks, as most of the consumer giants are being challenged by tough competition in China, the economic slowdown in Latin America and an ever strengthening US dollar. Many companies like Kimberly Clark (NYSE:KMB), Procter & Gamble (NYSE:PG) and Colgate Palmolive (NYSE:CL) have seen a decline in revenues and operating profits since 2011. Despite these factors, most of them are trading near their yearly or all time highs, which has led us to believe that these stocks might be overvalued.

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Competition In China

  • China, being the world’s second largest economy, is an important region for any consumer goods company. According to a report by Kantar World Panels, the local FMCG (i.e., Fast Moving Consumer Goods)  players in China grew by $41 billion in 2015, which accounted for 58% growth in the Chinese FMCG market. The growth rate of local brands was double than that of multinational brands.
  • The global brands are also losing the market share, for instance, in 2015, P&G (NYSE:PG) lost its top position in Tissue and Hygiene market [2] to the local player Hengan Fujian. In diaper segment, both Kimberly Clark (NYSE:KMB) and P&G are facing tough competition from Chinese and Japanese brands such as Merries, Moony and Goon. [3]
  • Another factor causing problems is the slowdown in growth of Chinese FMCG market, which has almost halved from 12% in 2012 to around 4.7% in late 2015.
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Latin America Economic Slowdown

  • Major Latin American economies are going through an economic slowdown with high inflation rates. Venezuela has an inflation rate of around 180% followed by around 40.5% in Argentina and 8.7% in Brazil [4].
  • Due to this, raw material costs have shot up significantly, which has led to higher prices of products resulting in a substantial hit to the volumes from the region for most of the companies. Colgate was the worst hit with 13.5% year-over-year decline in Q2 volumes from the region.
  • Also, Venezuela’s political and economic crises has led Kimberly Clark, Colgate Palmolive and P&G to either de-consolidate or close down their operations in the country.

Strengthening of US Dollar Trimming The Top-line

  • Since the start of the decade, the US Dollar has strengthened against most of the major currencies around the world leading to severe currency headwinds to the top-line of the FMCG companies as large part of their revenues come from outside North America.
  • According to Commitment of Traders report, since early 2015, large commercials and hedgers have continuously decreased their short positions in US Dollar Index, which further indicates that Dollar might strengthen more in coming quarters and continue to put a stress on the revenues.

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Notes:
  1. Reuters []
  2. Euromonitor report on tissues []
  3. Euromonitor report on nappies and diapers []
  4. www.tradingeconomics.com []