What does it take for the downtrend in shares of Colgate-Palmolive (NYSE: CL), Proctor and Gamble (NYSE: PG), and Kimberly-Clark (NYSE: KMB) to end? PG stock lost 5.8% last week and closed at a new low when the company reported that it cut prices of its goods but sales increased only 1%.
P&G cut prices of its U.S. shaving products in Q1. Sales for beauty and fabric and home care rose 5% and 3%, respectively but grooming and baby/feminine/family care both fell. Much of the company’s savings for productivity were wiped out from higher commodity cost increases.
The consumer goods sector faces incredibly high risks in the near-term as inflation takes hold. The stock’s sub-20x P/E and dividend yield of around 3.9% is not enough to compensate investors for the P/E compression ahead.
Markets may continue assigning lower multiples to P&G, Colgate-Palmolive and Kimberly-Clark stock on the expectation that it cannot pass higher costs to consumers. Inflation is tame for now but could accelerate enough that consumers respond to any price increase.
Commodity prices are going up disproportionately to the government-posted inflation rates. Already, oil prices are at four-year highs and metal prices are firming up. This trend will surely hurt profits for these consumer goods giants.
At current levels, though, KMB stock at a 16x P/E looks like a compelling value play. Colgate’s low dividend yield of 2.5% may still ward off value investors but P&G’s low forward P/E could warrant further buying interest from investors seeking value.
