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For consumer-staples companies to thrive long term, it is inevitable that a strong presence in emerging markets must occur. Some of the familiar players like Procter & Gamble (NYSE: PG ) , Unilever (NYSE: UN ) , and Colgate-Palmolive (NYSE: CL ) are all large global brands, yet investors might find more upside in a company with limited exposure like Church & Dwight (NYSE: CHD ) .
The warning signs are rolling in
Back in December Unilever CEO Paul Polman warned investors that a slowdown in emerging markets could be long-lasting, as significant structural reforms are necessary. Then, Procter & Gamble added additional substance to Polman's outlook when it reported earnings and issued guidance that were less than flattering.
Specifically, P&G has lowered its revenue guidance for 2014 to growth of zero to 2% from a prior 1%-2%. While this may seem insignificant, 1% of sales for P&G is more than $800 million, and the reason for this loss is foreign exchange volatility.
In P&G's guidance the company cites popular emerging markets like Venezuela, Argentina, and Turkey as affecting the company's top and bottom lines due to various and unpredictable changes in currency. Thus, the markets that so many of these large consumer-staples companies felt obligated to penetrate are now causing headwinds that could be long-lasting.
Where's the greatest risk?
While it would be near impossible to analyze the 200-plus countries where these companies have a presence, and the currency fluctuations throughout, a simple analysis of which consumer giants have the largest exposure to emerging markets might indicate greater investment risk.
For example, P&G earns 40% of its revenue from North America, meaning the remaining 60% is created outside the continent. Fellow giant Unilever shares a very similar ratio with 55% of its business being in emerging markets. Unilever specifically has been more aggressive than most in trying to solidify a large footprint in underdeveloped countries throughout the globe. Given Polman's outlook, this could be problematic for the giant.
Then, there is Colgate-Palmolive, which is a much smaller company with only $17.4 billion in annual sales. Colgate doesn't have the brand power of Unilever and P&G, but it has grown and enjoyed a five-year 100% return -- more than double P&G -- by investing heavily in emerging markets.
In fact, Colgate-Palmolive products can be found in 223 countries, with about 75% of annual sales coming from outside the U.S. As a result, Colgate-Palmolive is highly vulnerable to the emerging markets slowdown and forex volatility noted by its peers, and this fact might be reason enough to avoid this longtime market leader.
Where to invest?
If we assume that a larger emerging markets presence means higher vulnerability to the problems noted, then such companies could experience short-term selling pressure in their stocks. Realistically, a 1% negative impact on revenue growth and slightly lower GAPP earnings does not drastically alter the long-term investment value in such companies. Yet, for now, investors might be best served by investing in companies with less exposure to forex volatility, which currently is causing negative fundamental reactions.
The most notable option might be Church & Dwight, which is a smaller $9 billion company that sells brands such as Arm & Hammer, Trojan, Orajel, and First Response. The company has eight power brands that are all No. 1 in their respective categories in the U.S., which is where the company has focused the majority of its attention.
Unlike its peers, Church & Dwight does not have a great emerging markets presence. In fact, 83% of revenue comes from the U.S., and the remaining 17% is created from Western Europe, Brazil, Mexico, and Canada, meaning it mostly operates in North America.
Therefore, at 23 times earnings Church & Dwight does trade with a premium but is consistent with the multiple of its peers. Furthermore, with 3.6% expected growth, Church & Dwight should outperform giant P&G, and given its limited global exposure that outlook may prove to be intact.
In addition to being a good near-term investment opportunity in this space, Church & Dwight also serves as a good long-term investment.
With eight power brands in the personal care and household categories, the company has room for new product launches and a healthy balance sheet for potential acquisitions. Moreover, the company has the opportunity to strategically enter emerging markets when it sees fit, and can be selective in its level of fundamental exposure.
With that said, the underlying upside in emerging markets has not changed due to forex volatility. It may cause temporary weakness, but long-term all of these companies noted will likely be fine. However, given Church & Dwight's ability to avoid these short-term risks provides some sense of protection, and then with the ability to then enter these markets at a later time for growth serves as a golden opportunity.
Thus, Church & Dwight looks like a solid opportunity, one with a low risk profile and a significant amount of fundamental upside.
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