The Stalwarts of Soap
But there are some sectors that respond quite well to recession — consumer staples, for example. Consider that while the S&P 500, Dow Jones Industrial Average and Nasdaq have fallen 18%, 14% and 34%, respectively, so far this year, the Dow Jones Consumer Non-Cyclical index has slipped only 3%.
Consumer noncyclicals are the companies that pump out the stuff people need no matter what. Just because gross-domestic-product growth could slip into negative territory next quarter doesn't mean you'll stop using toilet paper or brushing your teeth. An unexpected uptick in jobless claims won't alter the number of times you'll have to change your baby's diaper. It's a point our columnist Robert Hunter has been hammering home recently — and for good reason. You might call it the Wal-Mart (WMT) effect. It's why the giant discounter of consumer essentials has just announced faster-than-expected sales growth for September, a month that saw sales plunge at chains that sell clothing and luxuries.
Of course, the producers of consumer staples aren't immune to macroeconomic pressures. For some, the strong dollar has been a pain, since their revenues in foreign currencies translate into fewer greenbacks. If costs for raw materials (like oil) rise, that could squeeze this group as well. And some companies are dealing with individual challenges, streamlining bloated product lines, reorganizing operations and cutting costs.
Still, these companies have a better chance of holding up in this climate than any go-go tech stock from yesteryear. But is it already too late to get into these names? We decided to take a closer look at two of the stalwarts of soap, Colgate-Palmolive (CL) and Procter & Gamble (PG).
There's still time to clean up with these two, according to Amy Low Chasen, a two-time Wall Street Journal All-Star analyst at Goldman Sachs. Last week, Goldman counted both among its favorite stocks when it upgraded the household-products sector to Market Overweight from Market Weight. And Chasen thinks stocks in the sector should outperform the broader market for the next six to nine months, thanks to accelerated earnings growth, a diminished risk of downward earnings revisions and the macroeconomic picture.
At the very least, this is a place where investors can park their money in the short term, says Howard Choe, equity analyst at Standard & Poor's. "Looking forward, there aren't significant catalysts for any of the so-called growth-stock areas," he says. "So that's why household products should hold up fairly well."
Though it's significantly smaller than industry leader P&G, Colgate-Palmolive is the performance benchmark for the sector. The company, whose products include Colgate toothpaste, Irish Spring soap, Palmolive dish soap and Science Diet pet food, carries the best margins, has some of the best growth and is the most consistent performer, according to Choe. With its shares trading at 27 times next fiscal year's earnings, you could certainly argue that Colgate is fully priced to reflect this strength (the S&P 500 trades at a forward multiple of 19). Still, the stock is sitting about 12% off its 52-week high of $65.69, reached last December. Analysts expect earnings to increase 13% both this year and next, according to Thomson Financial/First Call, giving Colgate a price/earnings growth (PEG) ratio of about 2.0, compared with the S&P 500's 1.3. So, it's a bit pricey by that measure too. But these days, a company posting any profit growth at all — let alone a growth rate in the double digits — may well deserve to trade at something of a premium.
As for P&G, the industry leader is a turnaround story in the works — as investors who were caught in the stock's hideous 50%-plus plunge in early 2000 have reason to know. The company is trimming its product portfolio, selling parts of its business and focusing on its faster growing health-care and cosmetics lines. On Wednesday, for example, it announced a definitive agreement to merge its Jif peanut-butter and Crisco cooking-oils businesses with J.M. Smucker (SJM) in an all-stock transaction valued at $1 billion. Many on Wall Street viewed the divesture as another positive step in winnowing out the company's less important brands. Despite the sale, P&G reiterated that it was comfortable with earnings estimates for fiscal 2002 (which ends in June). And on Tuesday, management told shareholders at the annual meeting that despite the economy's downturn, the company would meet its goals of 4% to 6% sales growth and double-digit earnings-growth rates.
Procter shares trade at a multiple of 20 times next fiscal year's earnings, a bit higher than the S&P 500's multiple of 19, and like Colgate, it sports a PEG of 2.0. But consider that Procter carries a beta — a measure of a stock's volatility — of just 0.3. (The S&P's beta coefficient is 1.0, so anything with a lower beta is less volatile than the market.) At $73, the stock is sitting about 8% off its 52-week high of $79.31. Considering how well the company is managing its turnaround strategy, S&P's Choe says the stock could appreciate from here.
Bear in mind, though, that when earnings start picking up again for high-growth companies — as they surely will someday — investors won't find consumer-staples stocks nearly as attractive as they do now. So while they may offer some shelter during times of economic storms, they aren't necessarily where you should take up permanent residence
