Personal product stocks generally aren't known for eye-popping returns, but they can offer stable growth in volatile market conditions. Personal product stocks are non-cyclical, which means that demand remains constant regardless of economic conditions. Let's take a look at two well-known personal product stocks, Procter & Gamble (NYSE:PG) and Coty's (NYSE:COTY), to understand the benefits and drawbacks of investing in the sector.
Procter & Gamble
Procter & Gamble owns one of the largest personal product portfolios in the world. Its top brands include Bounty paper towels, Tide detergent, Head & Shoulders shampoo, Fusion razors, Olay beauty products, and Pampers diapers.
Last quarter, P&G's revenue fell 12% annually to $16.5 billion and missed estimates by $640 million. All five of its businesses (beauty/hair/personal care, grooming, health care, fabric/home care, and baby/feminine care) posted double-digit sales declines. Organic sales, which excludes divestitures and currency impacts, only fell 1%. Core earnings, which exclude certain items but include currency impacts, dipped 1% to $0.98 per share but beat expectations by three cents. On a constant-currency basis, core earnings rose 12%.
The stark difference between P&G's constant-currency and reported numbers highlight how badly the strong dollar and weak overseas currencies hurt its growth. Two sore spots for the company are Venezuela and Russia, which both experienced currency meltdowns over the past year. With Fed rate hikes around the corner, the U.S. dollar could rise even more and ensure that 2016 is equally painful as the past year, when shares fell 15%.
Even after that decline, P&G shares aren't really cheap. The stock currently trades at 29 times earnings, which is higher than the industry average P/E of 24 for the personal products industry. P&G's forward P/E of 18 looks cheaper, but it's still a premium valuation compared to its projected annual earnings growth rate of 8% for the next five years. Several analysts have called for P&G to split into smaller companies to better compete against its more agile rivals, but the company doesn't seem likely to comply anytime soon.
Back in July, P&G agreed to merge 42 of its beauty product brands with Coty's (NYSE:COTY) portfolio for $12.5 billion. Coty, which sells fragrances, color cosmetics, and skin care products under licensed brands, will become the third-largest makeup company in the world after that deal closes in the second half of 2016.
Last quarter, Coty's revenue fell 6% annually to $1.11 billion and narrowly missed estimates by $30 million. But on a "like-for-like" basis, which only includes activities which were in effect during both periods, sales only fell 2%. Sales of its fragrances and skin care products fell annually on a like-for-like basis, but its color cosmetics business posted 9% growth on the same basis. Excluding currency impacts, fragrances and skin care revenue fell by the single digits while sales of color cosmetics surged 25%. Only 38% of Coty's revenues come from the Americas, so a strong dollar takes a big bite out of its sales.
On the bottom line, Coty's adjusted net income more than doubled to $219.7 million, or $0.59 per share, which exceeded estimates by $0.29. Coty attributed that growth to tax benefits and higher adjusted operating income. Looking ahead, Coty expects the P&G merger, which adds big brands like Cover Girl and Max Factor to its portfolio, to more than double its annual revenue and produced savings of $550 million on an annualized basis over the following three years. Coty also recently agreed to buy Brazilian personal care and beauty brand Hypermarcas S.A. for $1 billion. Both deals will substantially increase its exposure to overseas markets.
Investors seem optimistic about Coty's inorganic growth strategy, and the stock has rallied 35% this year. However, Morgan Stanley analysts recently warned that the company could suffer from acquisition indigestion after the deal, and the stock's trailing P/E of 29 remains significantly higher than the industry average.
Watch these stocks, but do your homework
P&G and Coty are interesting personal products stocks to watch, but I'm not eager to buy either one. Both companies face heavy foreign currency headwinds and growing pains ahead.
P&G might eventually streamline its business by divesting more brands, but it could be smarter to split into separate companies. Coty's brand portfolio will get much bigger next year, but it's unclear if the company can do a better job selling P&G's second-tier beauty brands than their previous owner. For now, I'd like to see how these plans pan out and wait for the dollar to weaken before investing in either company.