Which "mega-cap" stocks in the consumer goods sector are the best investment bets right now?
RBC Capital Markets analysts, led by Nik Modi, rank big-cap consumer goods stocks from least preferred to most preferred. RBC Capital Markets is a division of Royal Bank of Canada.
The seven stocks listed below all have market caps ranging from $48 billion to $223 billion.
Here's how these big-cap stocks stack up, according to RBC Capital.
- Market Cap: $223 billion
- RBC Target Price: $76
- Stock Upside: -9%
- Dividend Yield: 3.2%
"After several false starts, P&G is finally making the much needed changes to its organization that we have been worried about over the past several years (improved decision-making matrix, heightened levels of accountability, more risk taking)," RBC Capital analysts wrote. "However, we believe more needs to be done to sustainably turn around the top line.
"The last piece to P&G's turnaround puzzle is addressing the narrowing 'value equations' between P&G and its competitors across some of its key brands/categories/geographies," the note said. "We believe the company is building a storehouse of funds that will be used to invest back into marketing, correct price value equations, and refill the innovation pipeline (which is likely to weigh on FY17 EPS). However, at this point, we believe the stock is already pricing in 3-4% top line (versus 1% today). Reiterating Sector Perform."
Procter & Gamble is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Cramer and Jack Mohr, Action Alerts Research Director, wrote in a recently weekly commentary:
"We like the stability of PG's business model, even amid the uncertainty surrounding a possible Brexit, given the company's globally recognized brands and necessary consumer products.
"The company's slimmed-down portfolio, allowing management to focus on its best-performing brands, should result in positive organic sales growth over the next couple years. This top-line recovery has been years in the making and should help restore PG's premium multiple over the long term. Ultimately, the company's decision to streamline its portfolio puts it in a better position to win. While we continue to wait, we are happy accepting the approximately 3.25% dividend. We continue to view PG as a solid long-term investment and reiterate our $85 price target."
- Market Cap: $48 billion
- RBC Target Price: $125
- Stock Upside: -6%
- Dividend Yield: 2.8%
"Kimberly-Clark is a well-managed company, competing in some of the faster-growing global HPC (household and personal care) categories; however, at current levels, we believe it would need to continue to beat and raise its track record, which there may be some risk to, over the coming years," the analysts wrote. "These risks specifically relate to top-line and margin pressures, including: 1) slowing category growth; 2) stepped-up competition in emerging markets; 3) the threat of private label and P&G in developed markets; 4) the need to step-up advertising due to stepped-up competition; and 5) increased input cost volatility. Given valuation and these risks, upside is likely limited, so we believe there is more potential in our Outperform-rated mega-cap consumer staples names."
- Market Cap: $129 billion
- RBC Target Price: $62
- Stock Upside: -6%
- Dividend Yield: 3.4%
"Altria has played its role in the current market environment," the RBC Capital analysts wrote. "The stock has outperformed as investors have looked for lower volatility and consistent EPS delivery. With that said, we see limited upside from current levels given we believe Altria will be unlikely to significantly over-deliver on its 7-9% EPS guidance for the year, which would be required to see further multiple expansion. One potential incremental positive could be the use of cash proceeds Altria receives from the closure of the (ABI-SABMiller) deal (timing uncertain)."
- Market Cap: $150 billion
- RBC Target Price: $102
- Stock Upside: -2%
- Dividend Yield: 2.9%
"We believe PepsiCo is on track to deliver on expectations, but it is hard to see meaningful top/bottom line upside due to: 1) poor weather in key markets, 2) moderating c-store traffic and 3) ongoing macro pressure outside the U.S.," the analysts wrote. "We believe Trian's sale of its entire stake is likely a relief for PepsiCo management, but we view it as a negative for investors. We continue to worry about 'brain drain' at the company and deteriorating morale as a result of the company's 'Smart Spending' initiative."
Pepsi is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Cramer and Jack Mohr, Action Alerts Research Director, wrote in a recently weekly commentary:
"PEP remains one of our favorite investments across the entire portfolio given its 1) nearly 3% dividend yield, which tracks well against the backdrop of a low-rate environment; 2) operational excellence, which is seen in its 61% gross margins, 15% return on invested capital and unprecedented inventory management; and 3) low valuation, as it trades at discount to Coca-Cola despite boasting a faster top- and bottom-line growth rate," the note said. "From a macro level, PEP's business model provides a natural offset between interest rate and currency movements, which makes it a solid investment irrespective of the environment. We reiterate our $110 price target."
- Market Cap: $65 billion
- RBC Target Price: $71
- Stock Upside: -1%
- Dividend Yield: 2.2%
"Colgate continues to perform well in a very tough environment. However, we believe ongoing macro turmoil in Latin America (41% of Colgate's EBIT) will keep a lid on EPS upside (which we would need to see to justify more upside in the stock)," the note said.
- Market Cap: $73 billion
- RBC Target Price: $57
- Stock Upside: 12%
- Dividend Yield: 3.3%
RBC Capital Markets rates Reynolds American (RAI) at outperform.
"We believe RAI will continue to deliver 'best-in-class' performance this year (relative to other consumer staples companies) based on strong underlying fundamental performance and benefits from the Lorillard acquisition," the analysts wrote.
"With that said, we believe buy-side expectations are too high regarding cigarette volumes," they added. "More specifically, we believe the buy side is baking in volume declines sub 1-2% for the remainder of the year, while we expect volume declines closer to 2-3%. We also expect limited EPS upside in the near term for two reasons: 1) we believe RAI is storing up EPS cushion for its 2017 NPM cliff, and 2) we believe the company wants to provide its new CEO (we believe Debra Crew) a 'running start' when she assumes the role in November."
- Market Cap: $195 billion
- RBC Target Price: $51
- Stock Upside: 13%
- Dividend Yield: 3.1%
"KO remains our preferred mega-cap idea," the note said. "With that said, we believe April and May trends have been under pressure due to: 1) poor weather (in the US, EU, UK, Japan, Spain, Brazil and Turkey), 2) disruption from Coke's accelerated US refranchising efforts, and 3) sluggish macros in key emerging markets.
The note said that "feedback on the company's new 'Taste the Feeling' marketing campaign is positive (from bottlers/consumers). Our continued positive stance on Coca-Cola is based on four long-term distinct drivers/factors that we believe are currently being overlooked: 1) volume improvement as a result of refranchising (post the initial three-four months of transition; 2) the importance of Coca-Cola's new approach to marketing and its impact on category growth and market share trends; 3) the growing 'cost culture' at the company, which should manifest in best-in-class profit per employee metrics; and 4) the emergence of pricing power for the company."