Broadbase larger allocation portfolios for more stable all-weather performance - maybe sacrifice a little on the returns - for more stability -as Capital Preservation becomes more important, than aggressive growth. So a 60:40 or 70:30 Aggressive small company opportunities with stabler more mature, but still growth phase big companies is my quest from 2013 onwards!
Thanks Gautham. I agree totally on the theme, but may have very different choices to make than Nestle, GSK types - there are better growers with similar stability characteristics - and there doesn’t seem to be much evidence that markets have preferred the Nestle, GSK, Colgate types more. As you said, it all boils down to performance over the longer term, so I need to take a call on why others will perform better/ or why not.
Some very interesting point on FMCG sector from Arisaig Partners which is a unit which invests only in what they call “eat,drink,wear,wash,show(?)” consumer staple companies. i.e., only 70 out of 15000 companies in Asia.
The talk has good points on what’s driving the growth, how they see it panning out, formalization of retail space, reasons why branded/MNC brands tend to get a better chunk of growth in these markets, how no. 1&2 in each of the segment/categories have it easy compared to others. How MNC’s have only few of their product categories yet available in these markets, what role premiumization, urbanization, pent up demand etc etc… will play in this market.
Some points made about Colgate at 23 min mark, even with 55% market share it’s no where near it’s potential yet because only 10% of Indian’s brush their teeth!! only once a day, or with power on a stick etc etc…
He think’s economies like India are part of a structural story which may have a 20-30-50 years of growth ahead.
Overall a good presentation with lot of food for thought if one is thinking of investing in FMCG companies.
I think the info in Colgate company presentation is correct. only 10% of Indian’s brush their teeth cant be true. toothpaste and soaps are two highly (even rural) penetrated products… the info about brushing teeth only once a day can be true. ( i too brush only once)
Interesting discussion here. Thanks Samir for starting Colgate/Cummins debate and others for their comments.
My bet will be Colgate, unless you thoroughly understand the sector that Cummins operates and know its dynamics along with competitive landscape. I can bet a “large” portion of portfolio on Colgate and be almost sure (like FD) to make 15-18% without much hiccups for a very long period of time.
In case of Cummins, you will need to constantly monitor it. Although at times, returns may be better in short term, it will even out in longer period.
Colgate trades at 25 PE globally, so a 30 PE is not expensive. It’s entire earning is free cash which can be paid out. We can be pretty sure that even after 20 years, it will still trade at 20+ PE with single digit growth.
As buffet says, buy simple business that you understand which has minimal changes. Buy Cummins only if you understand its space.
Note: I do not own Colgate or Cummins. But looking to add positions in Colgate.
Colgate is a great company with a great track record. But surely a good asset is only good to invest in, if it is available at a reasonable price. A 30 or 32 PE is expensive. It includes lots of expectations of continued performance, which is not always sustainable. There is always the risk of expanded competition, regression to the mean and sectoral risks. An argument that 25 PE is the current global PE therefore 30 is ok, is not necessarily something that one ought to make. Surely, there is a 20(18?)% downside difference between 30 and 25, and in any case, the Global PE might be expensive too.
As an extension of the general argument of the FMCG business being expensive, consider P&GHH, or Unilever. They have even higher PE ratios than Colgate. What do you think of these stocks?
I think in the case of such steady performers, one needs to consider the historical mean PE’s. There will be a regression to the mean, in case the current PE is either lower or higher than the historical mean PE, unless of course, something has fundamentally changed in the company.
I also fail to understand the point about the simplicity of the business. Is Colgate a simple easy to understand business, because it is consumer facing, and we use its products everyday? Or is it simple, because it is present is only one sector of the FMCG business (dental care)? Would you call an Unilever not simple and easy to understand, then?
On the point of easy to understand & simple vs complicated business. My understanding is, if the dynamics of business won’t change overnight then we can call it a simple business. This “dynamics” should include customer’s buying habits, pricing power of the business, regulations, competition, impact of raw material prices and things like that. Above list is not exhaustive
If any change in the above things can catch us unaware unless we have industry specific knowledge or are always glued in on the developments, then it will appear as a complicated business to me. On the other hand, if the changes in above things will be gradual, can be visible to even a moderately alert investor then i will think of it as a simple business.
So, colgate appears simple to me. Yet to look into cummins or unilever.
I think your description of “simple businesses” is really great. It is a nice way to diffrentiate companies. And of course, Colgate is by this description, a simple business, and probably Cummins is not.
Thanks Raj. You really described the “simple” business very well. A complicated business for me can be a simple business for someone else if it falls under his circle of competence.
Samir, We seem to be comparing companies solely on the basis of PE which is not the best way. This will lead us to labeling a 30 PE business expensive than a 15 PE business.
I would argue that “valuation” of Colgate at 30 PE is similar to Cummins at 15 PE. Cummins at 15 PE is not cheaper than 30 PE Colgate.
Valuation 30 PE Colgate ~ Valuation of 15 PE Cummins
You also need take into consideration “owner earnings”, price/FCF, ROCE etc. What is the guaranty that 15 PE Cummins won’t become 10 PE.
In Buffet terminology, Colgate would be a “great” business and “Cummins” would be a “Good” business.
Hypothetically, Colgate can grow at 20% by re-investing just 20% of the earnings as the ROCE is 100%. Compare this with Cummins, which need to re-invest 50% of the earnings to grow at similar 20% as the ROCE is 40%. So a 15 PE is not always cheaper than 30 PE.
Both the stocks can potentially give similar returns in 10 years from now. But the Colgate returns will be more smoother with peace of mind. Whether to buy at current valuations or not will be a different subject. But my point is both businesses trade at similar valuations.
As we all know that looking at PE in isolation is not the right way to value a stock.
However, for the sake of this arguments let us just do that.A PE of 30 means that the investor is willing to pay 30 times for the firms earnings. This in turn means that the investor is willing to settle for a 3.33% yield. In the present day US, this yield is equivalent to what is available in long term bonds and is an acceptable investment as it carries some probability of an upside if Colgate performs well in the future.
However, in India, a PE of 25 translates into a yield of 4% and that is less than half the CPI inflation at the moment.
I don’t think that we can directly compare PE’s across markets even for the same stocks as the conditions in markets around the world vary immensely.
The above argument doesn’t in any way help us to determine if Colgate at present valuations is a good investment. This is just an alternate view of market comparisons.
Thanks for your replies. I agree with both of you that PEs looked at in isolation to the whole business model can be misleading.
Just to make a small point though. I feel that good engineering companies (like Cummins, but also KSB Pumps, SKF, Bosch etc.) also don’t invest 50% of their net earnings every year to eke out 20% growth. In India, 6-7% growth comes only from price increases, another couple of percent comes on margin increases due to volume increases, and the rest of the growth comes from volume increases. If this is true for FMCG companies, this is also true for engineering companies who have unique, differentiated products. They invest only 20-30% of their earnings every year.
I will put some of my openions comparison b/w Cummins & Colgate.
When we are just comparing the current PE,we should also consider the current depressed earnings of Cummins bcz of the over all economical situation.Once the situation changes stock can double (dont know when,2 -3-4 years ?).So even with a 10 year view this immediate trigger can boost the overall return…say 20+ cagr.
EVENTUALLY A GOOD COMPANY BOUGHT AT GOOD PRICE IS BETTER THAN A WONDERFUL COMPANY BOUGHT AT WONDERFUL PRICE.
It is a very good question that you have asked. There wa a statement I had read somewhere that ‘In a bear market, one would always hear of P/E on a trailing basis and in a bull market on forward basis (one or two year)’.
Coming to your question, the targets based on FY16E eps mean that based on Fy16 earnings, the present price should be Rs.x and the stock is trading at a discount. However, you would see that the target would normally be just 10 - 15% away from the current market price. As per my experience, one should just read the research reports to gain knowledge about the companies and the brokerage house’s view on the company and not look at the target price.