Consumer stocks are now as risky as they've ever been. Unemployment's historically high, consumers are spooked, and subpar earnings abound, as companies pay the price for lost competitive advantage or fiscal irresponsibility. But tough times can offer investors the best chance to buy stocks.
Even if stock prices are low, investors still need to be careful. Many companies simply won't survive the recession in their current form. And even if you love an investment, it's always Foolish to play devil's advocate, probing for its potential weak spots. To keep you and your portfolio ready for anything, I've highlighted two reasons to loathe consumer staples company Colgate-Palmolive
Pricy vs. peers
I've previously sung the praises of this well-known company, which markets brands such as Irish Spring, Speed Stick, Murphy's Oil Soap, and Palmolive dishwashing products. Now, I'm scouring away the bright spots, looking for vulnerabilities worthy of investor loathing.
What emerges after just a few swipes of steel wool concerns the stock more than the company: Shares are no bargain. Let's check out the peer-comparisons below to see exactly what I mean.
|
Company |
Share Price |
Current-year P/E * |
PEG Ratio |
Price-to-Sales Ratio |
|---|---|---|---|---|
|
Colgate-Palmolive |
$75.68 |
17.7 |
1.8 |
2.6 |
|
Procter & Gamble |
$56.58 |
13.8 |
1.5 |
2.1 |
|
Clorox |
$57.56 |
13.8 |
1.5 |
1.5 |
|
Unilever |
$28.45 |
16.1 |
1.8 |
1.3 |
|
Church & Dwight |
$56.02 |
16.3 |
1.4 |
1.6 |
|
Kimberly Clark |
$58.24 |
13.7 |
1.5 |
1.3 |
Data from Yahoo! Finance on 10/01.
*Current-year P/E based on analyst estimates listed on Yahoo! Finance.
Colgate-Palmolive's a strong company that has been withstanding the recession better than many, so it arguably deserves to trade at a premium to peers. Moreover, its current-year P/E is well below its five-year average P/E of 22.8. But these aren't normal times, and no one really knows what consumer sentiment or buying habits will look like on the other side of the recession.
At these levels, shares appear susceptible to the slightest shock in company results. If you're looking for long- and near-term stability from a consumer-staples investment, Colgate-Palmolive shares could disappoint.
Currency counts
One such shock could arise from foreign-exchange exposure. Roughly 75% of company sales are international. That's great if you want to diversify away from the U.S. consumer, but it means that financial results in dollar terms could be tarnished, as has been the case so far this year.
Currency headwinds are not only a matter of unflattering revenue headlines on an earnings release. Consumer-staples companies such as Colgate-Palmolive also purchase a number of raw materials for production. When costs are incurred in dollars, but sales are made in a weaker foreign currency, margins narrow and profit gets squeezed.
Colgate has a number of strategies in place to combat unfavorable exchange rates, but one such approach involves raising prices in local currencies. So far, that hasn't seemed to exact an undue toll on volumes or market share, but one has to wonder when international consumers will get fed up.
What do you think?
We've made our Foolish case on Colgate-Palmolive -- now it's your turn. Do you loathe Colgate-Palmolive? Love it? Share your comments below.
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