Value investing strategies have been less popular than growth investing strategies since the COVID-19-pandemic-driven market slump last year. However, an expected economic recovery this year is shifting investors’ focus away from pricey growth stocks to quality bargains.
The Procter & Gamble Company (PG) and General Mills, Inc. (GIS) are two of the world’s prominent consumer staples companies. They have largely benefited from the coronavirus pandemic because global shutdowns led to panic shopping and the hoarding essentials. With major countries now witnessing a second wave of the coronavirus and resuming selective lockdowns, both companies should benefit from pent-up demand for their products.
Both stocks have generated decent returns over the past three years. While PG returned 66.8% over this period, GIS gained 14.2%. However, in terms of their past-year’s performance, GIS is a clear winner with 12% returns versus GS’s 5.2%. But which of these stocks is a better value pick now? Let’s find out.
Business Structure and Latest Movements
PG manufactures and sells branded consumer packaged goods, with operations in approximately 70 countries worldwide. PG is a consumer staples company that has existed for 182 years. The company operates through seven segments – Beauty, Grooming, Health Care, Fabric Care & Home Care, Baby, Feminine & Family Care, and Corporate.
Gillette, a PG brand, formally launched Planet KIND yesterday. It’s a new shaving and skincare brand. Planet KIND packaging is recyclable and made with 85% recycled paper, 85% recycled plastic or aluminum. The company has partnered with Plastic Bank. Under the arrangement, every Planet KIND product purchased will incorporate eco-friendly choices and prevent 10 plastic bottles from entering the ocean.
GIS manufactures branded consumer foods and pet foods worldwide and is best known for its cereal brands, Cheerios. It also owns Pillsbury, Bisquick, and Betty Crocker in the baking aisle. It operates primarily across four segments – U.S. Retail, International, Pet Operating and the Convenience States, and Food Service.
GIS’s Big G cereal and got milk? (an advertising campaign launched by Goodby Silverstein & Partners) announced a historic partnership in the first week of January. For the partnership, , GIS will release special, limited edition boxes featuring characters with milk mustaches to highlight the benefits of cereal and milk. GIS further teamed up with Sesame Street in December to launch Sesame Street Cereal. The popularity of the TV show combined with GIS’s industry expertise should help the brand to realize commercial success soon.
Recent Financial Results
PG’s net sales in its fiscal second quarter ended December 31, 2020 were $19.7 billion, representing an 8% increase versus the prior year. Its organic sales also grew 8%, driven by a 5% increase in total shipment volume. Its adjusted free cash flow productivity came in at 113%. PG’s EPS for the quarter grew 4% year-over-year to $1.47.
GIS’s revenue for its fiscal second quarter ended November 31, 2020 grew 7% year-over-year to $4.7 billion, while its organic net sales were also up 7%, reflecting broad-based market share gains amid elevated at-home food demand resulting from the COVID-19 pandemic. Its operating profit increased 13% to $917 million, driven primarily by its Pet segment. Its adjusted EPS came in at $1.06 rising 9% year-over-year.
Past and Expected Financial Performance
PG’s revenue and EPS grew at a CAGR of 4% and 12.2%, respectively, over the past three years. Also, the CAGR of its free cash flow has been 13.1%.
Analysts expect PG’s revenue to increase 4.4% in the current quarter and 6.4% in the current year. Its EPS is expected to grow 1.7% in the current quarter and 11.1% in the current year. Moreover, its EPS is expected to grow at a rate of 9.2% per annum over the next five years.
In comparison, GIS’ revenue and EPS grew at a CAGR of 5.5% and 12.7%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 16.8%.
Analysts expect GIS’s revenue to increase 6.3% in the current quarter and 1.1% in the current year. Its EPS is expected to grow 9.1% in the current quarter and 4.2% in the current year. Its EPS is expected to grow at a rate of 4.9% per annum over the next five years.
GIS has an edge over PG here as well.
PG’s trailing-12-month revenue is more than four times GIS’. In addition, PG is the more profitable, with a gross profit margin of 52.1% versus GIS’ 35.5%.
PG’s ROE and ROA of 29.5% and 9.6%, respectively, compare favorably with GIS’ 27% and 6.8%, respectively.
In terms of forward P/E, PG is currently trading at 22.67x, just 1.1% cheaper than the industry average of 22.92x. In comparison, GIS’s forward P/E ratio currently stands at 15.15, which is significantly lower than the industry average of 22.92. In addition, PG is 51.3% more expensive than GIS.
GIS is also less expensive in terms of trailing-12-month P/S (1.90x versus 4.33x). However, its forward PEG of 3.53x is 18% higher than PG’s 2.99x. In terms of trailing-12-month price/cash flow, PG’s 16.69x is 75% higher than GIS’s 9.54x.
GIS looks much more affordable compared to PG.
PG has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. However, GIS has an overall rating of C, which represents a Neutral. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
While both PG and GIS have a Value Grade of C, GIS is relatively less expensive.
PG has a Stability Grade of A, indicating that it is less volatile than its peers, compared to a grade of C for GIS.
Beyond what I’ve stated above, our POWR Ratings system has also rated both PG and GIS for Growth, Momentum, Sentiment, Quality and Industry. Get all the PG ratings here. Also, click here to see the additional POWR Ratings for GIS.
There has been a structural shift to in-home consumption since the onset of the COVID-19 health crisis and consumers have gotten into the habit of eating affordable food that is ordered in. This trend is fueling growth in the consumer staples industry. Hence, both PG and GIS are good long-term investments considering their market dominance and unique product-lines. While PG is a good buy based on the factors discussed here, GIS better positioned from the value point of view.
GIS’s organic and ready-to-eat food products were in high demand amid the pandemic as away from home dining took a sharp fall. The company has expanded its product portfolio significantly over the past few years, introducing different kinds of organic and processed foods. This has helped the company increase its customer base significantly over this period because most of these items have proven to be a commercial success, thereby driving its long-term performance. However, the market is currently subject to heightened volatility and we think investors should wait for a better entry point.
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PG shares were unchanged in after-hours trading Friday. Year-to-date, PG has declined -6.32%, versus a 3.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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