Erin Lash: Much angst across the consumer products landscape has centered on the ability of manufacturers to reignite the stagnant top-line performance that has plagued a broad swath of industry firms, and this was a main topic at the Consumer Analyst Group of New York conference in February. While we’ve been encouraged that rhetoric by management teams across the sector has pivoted of late from an outsize focus on the importance of cost-cutting to one more centered on bolstered brand investments to drive profitable and sustainable gains, the proof is in the pudding.
In our view, the challenge hasn’t merely resulted from the level of spend though, but rather extends to include the speed and agility at which established manufacturers are bringing value-added innovation to market. More specifically, it has historically taken anywhere from 18-24 months for leading brands to get a product from concept to shelf but smaller, niche startups have proven much more nimble in responding to evolving consumer trends. We posit that efforts to empower local leaders to a greater extent and employ “test and learn” launches (starting small, incorporating learnings, and rolling out on a broader scale) are a few interesting approaches to combating these headwinds.
From a valuation perspective, we’d suggest wide-moats Kellogg and Campbell Soup each appear attractive, trading at more than 20% discounts to our valuation. Both operators are working to shed noncore businesses from their mix as a means to focus their resources (both financial and personnel) on the highest return opportunities, which we view as prudent.
Some operators, though, have withstood these headwinds, including wide-moats Clorox and McCormick. However, neither strikes us as attractive bargains at current levels, trading at 15% to 30% premiums to our fair value estimates. But we’d suggest investors keep each on their radar for a more attractive valuation.