Share tip of the week: head and shoulders above the rest
By
Tim Price Sep 04, 2007
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Depending on your point of view, the recent stockmarket volatility is either a buying opportunity or a reason to steer clear of higher-risk assets. But I believe it could, perversely, be both. The bulls would have it that the problem is ‘contained’, and that concerted central bank action will soon have markets off to the races again. The bears maintain that there are still more ‘shoes to drop’, and that we haven’t seen the end of corporate losses relating to subprime or otherwise impaired debt exposure.
I’m more sympathetic to the bears, but by the same token the indiscriminate nature of the recent sell-off has left stocks of otherwise unimpeachable quality suddenly on sale – provided those firms really do have limited or negligible exposure to low-quality debt or to US consumers. I find it hard to believe that with US residential property in crisis (unsold properties are at a 19-year high), the US consumer will be able to maintain, let alone exceed, the rate of spending the US economy has enjoyed these last few years.
Tip of the week: Procter & Gamble (NYSE:PG), tipped as a BUY by BMO Capital Markets
When it comes to defensives, Procter & Gamble has few peers. Bolstered by its 2005 acquisition of razor and ‘grooming products’ maker Gillette, Procter & Gamble is now a $203bn consumer products powerhouse – and the world’s largest. Operationally, the firm is in great shape. 2006 saw CEO Alan Lafley report its fifth consecutive year of matching or beating long-term sales growth targets. The firm is a global leader in the sectors of baby, feminine and fabric care, with market shares of roughly one third in each category.
In some markets, Procter & Gamble enjoys almost monopolistic dominance; its Gillette blades and razors business, for example, has a global market share in excess of 70%. And legendary investor Warren Buffett became one of Gillette’s most outspoken shareholders – “You go to bed feeling very comfortable just thinking about two and a half billion males with hair growing while you sleep. No one at Gillette has trouble sleeping”. Buffett, one of Gillette’s largest shareholders, also welcomed the Procter & Gamble acquisition in 2005 as “a dream deal”. (The fact that he made roughly $645m in a single day on the back of it probably didn’t hurt either.)
Procter & Gamble reported strong fiscal fourth-quarter profits earlier this month. Profit rose to 67 cents per share ($2.3bn) from 55 cents, with revenue rising 8% to $19.3bn. The company also announced plans to buy back $24bn-$30bn of stock over the next three years.
And this is not just a US market story. Procter & Gamble has 300 brands for sale in more than 180 countries. In developing markets, the company has grown sales by 16% a year for the last five years. The group reckons that after-tax its margins are comparable with those achieved in the developed world. As a relatively low-risk play on the growing wealth of middle classes within emerging economies, Procter & Gamble has much to recommend it.
While results were broadly in line with analyst expectations, the buyback plan was a powerful signal of the firm’s faith in its underlying value. The stock is covered by 21 brokers: 16 rate Procter & Gamble a ‘buy’, five a ‘hold’. With Wall Street so upbeat on such a highly regarded consumer products play, there is little chance of dramatic outperformance in the short-to-medium term. But for risk-averse investors, Procter & Gamble stands, if you’ll pardon the pun, head and shoulders above the rest of the market. As you’d have expected, Procter & Gamble stock has sailed through the recent market storms almost intact. As Warren Buffett might say, this company is as close as the stockmarket offers to a ‘sleep at night’ investment.
Recommendation: ACCUMULATE, particularly if the stock approaches its recent $61 low.
Tim Price is CIO of Global Strategies at Union Bancaire Privée, London. Tim also runs his own share-tipping service, The Price Report.
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