CL vs. PG Stock – Which Is the Better Buy?

by Dan Burrows | October 28, 2013 6:05 am

CL vs. PG Stock – Which Is the Better Buy?

ProcterGambleLogo CL vs. PG Stock   Which Is the Better Buy?PG stock has lagged the broader market by a wide margin for the year-to-date, but encouraging signs from Procter & Gamble’s (PG[1]) turnaround suggest better things in 2014.

Rival Colgate-Palmolive (CL[2]) has different concerns, namely sluggishness in emerging markets where it enjoys commanding market share and derives more than half its revenue.

And although PG and CL are two of the biggest consumer products companies on the planet, that’s left them no place to hide from a strong dollar.

How bad has it been? PG, known for Tide detergent and Crest toothpaste, said core earnings per share fell 1%[3] in the third quarter.

However, excluding the effects of foreign currency exchange (a strong dollar), PG core earnings would have increased 8%. The dollar is hurting profit, and by extension, PG stock.

CL similarly suffered. Third-quarter profit was essentially flat[4] as foreign exchange knocked 4.5 percentage points off total revenue. Some regions fared even worse. Latin America, which accounts for almost 30% of global sales, saw revenue take a hit of 11 percentage points as currencies there weakened against the greenback.

Fortunately for holders of CL or PG stock, both companies served up encouraging guidance for next year.

PG sees 2014 adjusted earnings rising 5% to 7%, while CL said next year’s earnings will expand at a double-digit-percent rate.

PG Stock vs. CL Stock

But if you had to pick just one of these consumer product giants for 2014, which would be the better bet?

True, PG stock is lagging the S&P 500 by more than 5 percentage points so far this year, but its much-touted turnaround is starting to turn.

Organic sales and volume both grew a healthy 4% in the most recent quarter. And although margins contracted, PG is investing in its European and North American supply chains to wring costs out of those sprawling operations. It will take time, yes, but that capital should eventually generate attractive returns for the bottom line and, by extension, anyone holding PG stock.

CL, for its part, has seen shares lag the broader market by 2 percentage points for the year-to-date — and yet it’s still looking pretty pricey.

Yes, CL is doubling down on its own efficiency efforts with a cost-cutting program that will slash its workforce by 6% over the next couple of years. And CL has much higher operating margins and return on equity than PG.

But given that the operating environment for both companies is essentially the same, which shares — PG stock or CL stock — have more upside?

After all, emerging markets hurt CL more than PG, but PG still derives 40% revenue of its revenue from the developing world. It’s hard for either company to raise prices amid widespread consumer caution. And currency movements take their toll on both PG’s and CL’s results.

That leaves us with valuation, which at this point favors PG stock.

Both CL and PG stock offer a 25% discount to their own-five year averages on forward earnings basis, according to data from Thomson Reuters Stock Reports.

That means they both look pricey at current levels. But on an absolute basis, CL stock looks worse. It sports a forward price-to-earnings multiple (P/E) of 20 with a long-term growth forecast of 9.4%. That’s more expensive than the S&P 500 despite having slightly lower projected growth.

As for PG stock, the forward P/E stands at 17 with a long-term growth rate of 8.4%, Yes, that’s still pricier than the broader market despite having a lower growth forecast, but it’s considerably cheaper than CL. PG stock is also less expensive than CL stock by price-to-sales.

No, PG stock doesn’t look like a bargain, but compared with CL, it looks like it’s on sale. If the turnaround keeps turning, there appears to be a better chance for upside over the longer term.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  2. CL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CL
  3. core earnings per share fell 1%: http://news.pg.com/press-release/pg-corporate-announcements/pg-delivers-first-quarter-core-eps-105-organic-sales-4
  4. Third-quarter profit was essentially flat: http://investor.colgate.com/releasedetailpop.cfm?ReleaseID=799669

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