Always own best of breed, Cramer said Thursday, meaning you should always be willing to pay up for the highest quality stock in a particular sector.
Determining which company is superior can be challenging though, the "Mad Money" host acknowledged. To guide you, he examined three of the world’s largest consumer staples companies, all of which reported earnings this week: Kimberly-Clark reported Tuesday, Procter & Gamble on Wednesday and Colgate Palmolive before the opening bell Thursday.
Judging by their results, you’d think the aforementioned companies were in different industries.
Kimberly-Clark, for example, reported earnings of $1.14 per share for a 14 cent miss and also issued downside guidance for the full year. It said organic sales were up just 1 percent while lowering its outlook for organic sales growth to 2 percent from the 2 to 4 percent range. The Dallas-based company said it’s losing market share to private labels, meaning people are buying store brands instead of the Kimberly-Clark brand.
Yet when Proctor & Gamble reported earnings Wednesday, company executives said private label market share was flat. Perhaps Procter & Gamble is having a different experience because it’s simply a stronger company, Cramer said.
Procter & Gamble reported earnings of $1.02 a share for a 2 cent beat, reaffirmed its full-year guidance and raised its forecast for 2011. Cramer called it a “high-quality beat,” which came from higher than expected volumes that increased 7 percent year over year. He also credited organic growth of 4 percent higher than the whisper number of 2 to 3 percent.
Cramer said it’s possible, however, for a company to have a better-than-expected quarter, but still not be any good. Colgate-Palmolive, for instance, earned $1.21 per share for a 2 cent beat, only revenues were down 1.4 percent due to cost cutting and the like. Although it reported an earnings beat, the company itself seems to be doing worse, Cramer said. Organic sales growth decelerated from the previous quarter.
With all three of these companies competing in the consumer staples space, how did Proctor & Gamble manage to do so much better?
Part of it is scale, Cramer said. Each of its 22 brands generate at least a billion dollars in sales. Another 20 make the company $500 million and more. Scale is key because volume growth can offset pricing pressures that often hurt Kimberly-Clark, Cramer explained. So even though Procter’s pricing fell by 1 percent, it saw a 7 percent rise in organic volumes.
Procter also continues to gain exposure in emerging markets. These fast-growing areas now represent slightly more than 30 percent of the company’s total revenues. Aside from pet food, every segment saw double-digit increases in volumes in emerging markets.
At 15 times forward earnings, Cramer said Procter trades at a premium to KMB and CL, which sells for 12 and 14 times earnings respectively. PG is more expensive, but Cramer thinks it’s worth paying up for a best of breed name like Procter & Gamble.
When this story was published, Cramer's charitable trust owned Procter & Gamble.
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