Legendary investor Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” For core stocks that should pay you for the rest of your life if you simply buy and hold them, I’d choose wonderful companies at fair prices every time.
I believe FTSE 100 household goods giant Reckitt Benckiser (LSE: RB) is a wonderful company and that it’s currently trading at a fair price. I’ll come back to it shortly, but first I’m going to look at a smaller sector peer, McBride (LSE: MCB), which released its annual results today.
Bad year
McBride manufactures and supplies household and personal care products that retailers sell under their own labels. It describes itself as the leading European company in its field. I last wrote about it a little less than a year ago. It was making good progress toward its target of increasing its operating margin to 7.5% and the shares were trading on 13.7 times forecast earnings at a share price of 215p.
My positive view on the stock last year proved to be ill-judged. After profit warnings this year in January and July, the shares have fallen to around 130p (little changed on today’s results), valuing the company at £237m. The results showed a fall in operating margin to 5.5% from last year’s 6.6%. Has McBride’s business gone off the rails or is it suffering a temporary setback?
Competitive advantage
Last year’s headwinds, including high input cost inflation, were even more damaging to many of McBride’s competitors. A key rival in Germany went into administration and there are continuing reports of others in difficulty. McBride should benefit as a result. Disposals of its skincare business in the Czech Republic and its lossmaking European Personal Care Liquids business should also help, as should its acquisition of a Nordic supplier in the growth segment of dish-wash and laundry products.
I believe McBride’s scale and cost advantage within its supply chain give it a decent competitive advantage. On this basis, and with it trading on just 8.9 times forward earnings with a running dividend yield of 3.3%, I’m inclined to rate it a ‘buy’.
Quality blue-chip
Brands powerhouse Reckitt Benckiser, whose stable includes Dettol, Durex and Nurofen, is truly a blue-chip business. At a current share price of around 6,500p, its market cap is £46bn. It can charge high prices for its trusted brands. As my Foolish colleague Roland Head noted when reporting on its strong half-year results in July, the firm’s products are part of the fabric of life for many millions of people.
Highly valuable brands and good management show up in the group’s fantastic operating margin — 23.6% in the latest period. Over the years, Reckitt has been adept at adapting its business for continuing strong growth through shrewd and selective strategic acquisitions (and disposals). Last year’s £13bn acquisition of infant formula business Mead Johnson is already shaping up nicely.
I’ve said in the past that I’d be happy to pay up to 25 times forward earnings for a business of Reckitt’s quality. As the rating is currently 19.7 times, with a running dividend yield of 2.6%, I rate the stock a ‘buy’.
