Can These Consumer Companies Thrive in The Great Recession?

Following on my recent post that revealed the rise in American consumption predicated in large part on ever-rising healthcare costs, I decided to question my own view that US consumers would drastically retrench. Contrarian thinking is key to making good investment decisions — we should apply it to our own views once in a while.

My latest screen, conducted via the Morningstar website, focused on companies in the consumer goods sector. Specifically I used the following criteria:

  • Stock sector – consumer goods
  • Net margin >= 10%
  • Price-to-sales <= 1.0
  • Market capitalization > $100M

The consumer goods requirement is self-explanatory. As always, I look for cheap stocks but instead of the traditional PE ratio, I used price-to-sales, a ratio made famous by Ken Fisher. I also like companies with high levels of performance, which explains the net margin requirement. This screen netted twenty stocks, many of which contained China in the name and sported miniscule market caps. To whittle it down, I limited the market cap to $100M or higher.

You can view the results as well as my cash flow valuation figures for them on this spreadsheet.

Two of the companies, AgFeed Industries (FEED) and Cal Maine Foods (CALM), operate in the food industry, with short histories and volatile financial results. AgFeed deals with pork feed products in China while Cal Maine handles eggs in the US.

Harley Davidson (HOG) is well-established but has suffered horrific cash losses for over a year. However, on a normalized earnings basis, HOG could be attractive but further research is required to project the company’s normalized earnings power. The issue of consumer spending may be a determining factor in assessing Harley-Davidson’s future level of sales.

Unilever NV (UN) seems as steady as they come, generating anywhere from 2.5B euros to 4.4B euros in each of the last 6 years. Readers are advised that Unilever has a related company, Unilever PLC (UL).  Both are part of the larger Unilever Group and each operates in separate business segments.

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