The Procter & Gamble Company (PG) and Colgate-Palmolive Company (CL) are two prominent companies in the consumer goods industry. Cincinnati, Ohio-based PG sells packaged goods through mass merchandisers, e-commerce, grocery stores, membership club stores, drug stores, and department stores. The company operates in five business segments—beauty; grooming; health care; fabric & home care; and baby, feminine & family care. In comparison, New York City-based CL sells consumer products that are manufactured under its oral, personal, homecare, and pet nutrition segments. It markets and sells its products to various retailers, wholesalers, e-commerce, and distributors.
Amid the resurgence of COVID-19 cases, rising inflation, and supply chain logjams, U.S. retail sales have been rising since August, with a 1.7% month-over-month increase in October, owing to declining jobless claims and rising consumer spending ahead of the holiday season.
Further, the inelastic demand for consumer goods across business cycles has been helping the industry offset the consequences of high inflation. Investor optimism in this space is evident in the First Trust Consumer Staples AlphaDEX ETF’s (FXG) 3.7% gains versus SPDR S&P 500 Trust ETF’s (SPY) 3.3% returns over the past month. The global consumer goods (FMCG) market is expected to grow at 5.4% CAGR to reach $15.36 trillion by 2025. So, both CL and PG should benefit.
While CL’s stock has gained in price marginally over the past nine months, PG has surged 16.8%. PG is a clear winner with 5% gains versus CL’s 2.7% returns in terms of their past month’s performance. But which of these stocks is a better pick now? Let us find out.
On September 14, 2021, PG announced a comprehensive plan to achieve net-zero greenhouse gas emissions across its operations and supply chain—from raw material to retailer—by 2040. PG is looking forward to purchasing 100% renewable electricity and leveraging renewable thermal energy at its manufacturing sites. Also, the company is exploring carbon capture technology developed by Twelve, a carbon transformation company, to incorporate CO2 from emissions into ingredients that could be used across its Tide brand. These efforts should enable PG to achieve its interim 2030 goals.
On August 6, 2021, CL announced a strategic collaboration with Verily Life Sciences, an Alphabet Inc. (GOOGL) subsidiary that is focused on life sciences and healthcare, to conduct advanced oral health research as part of Verily’s ongoing Baseline Health Study to improve the understanding of connections between oral health and overall health. The effort marks CL’s commitment to accelerating and improving clinical research through the smart use of data, creative collaboration, and unrivaled technical capabilities.
Recent Financial Results
For its fiscal third quarter, ended September 30, 2021, PG’s net sales increased 8.7% year-over-year to $20.34 billion. The company’s gross profit came in at $9.97 billion, representing a 2% decline from the prior-year period. Its operating income was $5.02 billion, down 4.9% from the prior-year period. PG’s net earnings were $4.11 billion for the quarter, representing a 3.9% decline from its year-ago period. Its EPS decreased 1.2% year-over-year to $1.61, and the company had $10.37 billion in cash and equivalents as of September 30, 2021.
For its fiscal third quarter, ended September 30, 2021, CL’s net sales increased 6.3% year-over-year to $4.41 billion. The company’s gross profit came in at $2.62 billion for the quarter, indicating a 3.3% rise from the prior-year period. CL’s non-GAAP operating profit was $967 million, down 3.5% from the prior-year period. While its non-GAAP net income increased marginally year-over-year to $689 million, its EPS increased 2.5% to $0.81. The company had $958 million in cash and equivalents as of September 30, 2021.
Past and Expected Financial Performance
PG’s revenue and net income have increased at CAGRs of 4.9% and 11.9%, respectively, over the past three years. The company’s EPS has increased at a 12.6% CAGR over the past three years.
Analysts expect PG’s EPS to grow 4.6% year-over-year in the current year and 7.4% next year. Its revenue is expected to grow 4.3% year-over-year in the current year and 3.9% next year. The stock’s EPS is expected to grow 7% year-over-year in the next year.
In comparison, CL’s revenue and net income have increased 3.5% and 8%, respectively, over the past three years. The company’s EPS has grown at a 9.1% CAGR over the past three years.
CL’s EPS is expected to increase 4.9% year-over-year in the current year and 5.9% next year. The stock’s revenue is expected to grow 6.1% year-over-year in the current year and 3.6% next year. Analysts expect the stock’s EPS to grow at a 6.1% rate per annum over the next five years.
In terms of forward EV/Sales, PG is currently trading at 4.80x, which is 15.7% higher than CL’s 4.15x. And in terms of forward EV/EBITDA, CL’s 16.15x compares with PG’s 17.77x.
PG’s trailing-12-month revenue is almost 4.4 times CL’s. However, CL is more profitable, with a 60.3% gross profit margin versus PG’s 50.5%.
Furthermore, CL’s ROE, ROA, and ROTC of 270.7%, 15.4%, and 28.3%, respectively, compare with PG’s 29.8%, 9.6%, and 14.5%.
Both PG and CL have an overall B grade, which translates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.
PG has an A grade for Stability, which is consistent with its lower volatility than the broader market. It has a 0.41 beta. CL’s B grade for Stability is in sync with its relatively higher volatility. CL has a 0.57 beta.
In terms of Quality, CL has been graded an A, which is consistent with its higher-than-industry profitability ratios. CL’s 428.5% trailing-12-month return on equity is 3454.6% higher than the 12.1% industry average. In comparison, PG’s B grade for Quality is in sync with its relatively lower profit margins. It has a 30% trailing-12-month net income margin, which is 148.6% higher than the 12.1% industry average.
Of the 70 stocks in the Consumer Goods industry, CL is ranked #16, while PG is ranked #9.
Beyond what we have stated above, our POWR Ratings system has also rated CL and PG for Value, Growth, Momentum, and Sentiment. Get all CL ratings here. Also, click here to see the additional POWR Ratings for PG.
PG and CL should grow substantially in the coming months owing to their strong fundamentals and inelastic demand for their products. But while both PG and CL are good bets now, we think CL looks like a better buy here because of its higher profitability and lower valuation.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Consumer Goods industry.
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PG shares were trading at $147.78 per share on Wednesday morning, down $1.66 (-1.11%). Year-to-date, PG has gained 8.88%, versus a 26.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market. More...
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