Diversified consumer goods company PZ Cussons (LSE: PZC) is often compared to industry leader Unilever (LSE: ULVR). Both companies generate profitable repeat sales from established consumer brands and have enviable exposure to emerging markets. These desirable traits could produce both growth and income over the long term, but which company will be the winner for years to come?
Cussons has had a hard time of it in recent years and will probably struggle to rival Unilever’s £131bn market cap in our lifetime. However, I’m confident that the agile growth company can outperform its lumbering rival over the next few decades.
Its revenues fell from £821.2m in 2016 to £809.2m in 2017 after issues in Nigeria intensified. Operating profit follow suit, falling 2% to £106.3m. These figures won’t attract hordes of growth-hungry investors, but those in it for the long term should appreciate how robust the company’s performance has been in the face of considerable macroeconomic headwinds.
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This quote from the company’s annual report illustrates the severity of Nigeria’s economic situation: “The introduction of a new flexible exchange rate regime in June 2016 led to a 50% devaluation of the Naira to US Dollar on the interbank market.”
In real terms, the Nigerian consumer has had to pay 50% more for everyday items this year than last, yet despite this, Cussons’ Nigerian business registered only a 14.5% fall in revenue. In constant currency terms, sales increased 4.5%. That’s a considerable swing in performance driven by a factor completely outside of PZC’s control, yet considering the context, it’s not a bad performance.
The company has managed to maintain profitability, despite these conditions, through a combination of overhauling packaging, manufacturing costs savings and by tweaking prices. Local sourcing and manufacturing capabilities have helped weather the worst of currency headwinds, too.
The Nigerian economy is very much tied to the oil price and Cussons’ results could, therefore, be volatile over the next few years. The company is performing strongly in Europe and Asia however, which seems likely to provide more steady, if less explosive, growth over the long term. After a 2.1% hike in 2017, the company has now paid — and increased — a dividend for 44 consecutive years.
In the long term, I’d expect the brand loyalty the company is developing in countries like Ghana, Nigeria and Malaysia will pay off as populations expand and wealthier middle classes emerge. If we head back to a time where trading conditions were favourable, we can see the potential growth on offer at the company. Between 2008 and 2011, the company grew profits by over 65%.
Unilever, on the other hand, is far more diversified than PZC and is, therefore, less likely to be held back by poor performance in any given country. That said, its sheer size is a barrier to growth. The company increased underlying sales by 3% in the first half of this year, although margins have improved faster than expected, driving underlying earnings per share 14% higher. This sort of margin improvement, while very impressive, is unsustainable year-in-year-out, whereas Cussons could realistically expand revenue for decades.
Unilever currently trades on a PE of 21 while yielding 2.9%. Cussons is 24 and 2.3% respectively.
Rather than pick between the two, I’d buy both of these companies, but I feel the troubles in Africa are more than priced into PZC, which has the potential to outpace Unilever’s more steady expansion.
