uploads///Q Valuation

Behind CPG Companies’ High Valuation Multiples in 4Q15

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Mar. 23 2016, Updated 10:06 a.m. ET

Relative valuations

As of March 17, 2016, CPG (consumer packaged goods) companies were trading at higher valuations relative to the S&P 500 Index (IVV) (SPY) (VOO) and the Dow Jones Industrial Average (DIA). Procter & Gamble or P&G (PG) and Kimberly-Clark (KMB), for example, were trading at PE (price-to-earnings) multiples of 21.9x forward earnings and 22.2x forward earnings, respectively, as of March 17.

By comparison, the S&P 500 Index and the Dow Jones Industrial Average were trading at forward PE multiples of 17.2x and 16.0x, respectively, as of the same day.

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Despite the foreign currency impacts faced by P&G in 4Q15, the company’s valuation has risen by 7.9% since the start of 2015. P&G’s sales growth declined by 5.3% due to currency headwinds, whereas Kimberly-Clark’s valuation has risen by 15.1% since January 2015, despite the stronger US dollar, primarily due to volume growth in North America from wiper and bathroom products.

As of March 17, Colgate-Palmolive was trading at a PE multiple of 25.4x forward earnings, which means that its valuation has risen by 13.5% since January 2015. This was due to a unit volume increase of 1% in 4Q15, primarily driven by the North American region.

Church & Dwight and Clorox trading higher than peers

Other companies like Church & Dwight (CHD) and Clorox (CLX) were trading at PE multiples of 26.3x forward earnings and 25.5x forward earnings, respectively, as of March 17. Church & Dwight’s and Clorox’s valuations are higher than peers because both companies delivered strong 4Q15 results and saw higher sales growth of ~3% and 2.6%, respectively. CHD’s valuation has risen ~10% since January 2015, whereas Clorox’s valuation has risen by 11.4% over the same time period.

At the same time, as the industry struggles with the impact of the stronger US dollar, higher pricing in developing economies has offered relatively better prospects. A growing population and a rising disposable income in emerging markets have begun to act as top-down growth catalysts for the industry.

In the next and final part of this series, we’ll discuss growth initiatives and outlooks for our selection of CPG companies.

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