Procter & Gamble Vs. Unilever
Sometimes the better company isn’t necessarily the better stock.
That’s the lesson Cramer learned when comparing his favored Procter & Gamble to Unilever, using the same strategy against which he tested McDonald’s versus Burger King, Coke versus Pepsi, Tiffany versus Coach and Hershey versus Cadbury .
Returning to Cramer’s 10-point rating system, we start with sector first when valuing a stock. Soft goods is a great business in which to invest during a slowing economy, especially when inflation has peaked and the companies’ costs are coming down. So both companies get five points right off the top because a sector is responsible for half of a stock’s worth.
The next factor to consider is growth. Procter for the last quarter beat earnings estimates and said that the company still expects 5% sales growth and earnings growth of 6% before interest and taxes, despite $3 billion more in higher commodity costs. Volume growth wasn’t great, but it still surprised analysts, who were bracing for the worse. Compare that with Unilever that reported in-line numbers and negative volume growth. Two points to Procter for this category. Score: 7-5, Procter.
Then we consider how the two companies are positioned internationally. Unilever, a European company, brings in more sales from outside the U.S., and is in position to capitalize on a stronger dollar, as its American sales will translate into more euros. Overseas profits for PG, however, as other currencies lose ground against the greenback. So Unilever gets a point here. Score: 7-6, Procter.
Procter wins when you compare management teams, though. Unilever’s in the middle of a turnaround and we don’t know who the new CEO will be, while PG has CEO Alan Laffley and his strong track record and at least four more years of his stewardship before he reaches the mandatory retirement age. Two points for Procter here. Score: 9-7, Procter.
The penultimate contrast is the ability to control costs. PG’s sales are double the size of Unilever and Procter has a 18% operating margin compared Uni’s 13%. Plus, Procter’s a leader in practically all of its product categories, so it’s easier for the company to raise prices to deal with rising costs. Now that those costs are coming down, Procter makes even more money. One more point for Procter, bringing the final tally to 10-7, Procter.
Given the score, there’s no doubt that Procter is the better company. So you’d think at first glance that it makes the better investment. But the problem here is that the market knows PG is better. Just look at the multiples, which is the last thing you do before deciding between two stocks: Procter at $69.90 trades at 16.2 times 2009 earnings. Unilever at $28.25 trades at 13.7. Sure, PG deserves to trade at a premium to Unilever, but not that much, Cramer said.
This is why price matters a bit more at times, especially with soft-goods companies. These stocks, unlike others, are actually cheaper when they drop in price. So Kimberly-Clark at $62 might not make sense, but it does at $54. The same goes for Clorox at $52.
So while Cramer said he still prefers Procter over Unilever, if only by a bit, if PG heads to its old high of $75 and Uni to its old low of $26, he’d make a switch.
Jim’s charitable trust owns Procter & Gamble.
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