As the FTSE 100 has languished, Unilever has racked up a double-digit gain of 10.2%. Reckitt has followed closely behind with a gain of 4.4%, and PZ Cussons has added 4.2% since the middle of September. Over the same period, the FTSE 100 has only gained 2.4%.
Even before the gains of the past four weeks, Unilever, Reckitt and PZ Cussons looked expensive. And after last months gains, these three consumer goods champions are now trading at a significant valuation premium to the wider market.
The FTSE 100 and FTSE 250 currently trade at forward P/Es of 17.5 and 18.7 respectively. Unilever currently trades at a forward P/E of 21.4 and Reckitt trades at a forward P/E of 25.2.
PZ Cussons trades at a forward earnings multiple of 16.3, which doesnt look overly expensive at first glance. Nevertheless, over the past 12months City analysts have slashed theirgrowth expectationsfor the company by 10%.
As a result, City figures suggest that PZ Cussons earnings per share are set to grow at a glacial 2% this year. Its hardly worth paying a premium multiple for this lackluster growth rate.
Unfortunately, all three of these companies now trade at nosebleed valuations, even compared to their own historic trends. For the past decade, Unilever has traded at an average forward P/E of 16. The companys current valuation implies that the stock is overvalued by around 34%. Moreover, it looks as if Reckitt is trading at a 58% premium to its ten-year average forward P/E.
And there are more figures thatshow that Reckitt is exceptionally overvalued at present.
Comparing Reckitt to the rest of the companys international peer group shows how overvalued the company is.
Reckitt trades at a 2015 enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) ratio of 18.4. In comparison, the groups twoclosest international peers, Colgate-Palmolive and P&G trade at forward EV/EBITDA multiples of 14.7 and 12.2. Simply put, Reckitt is trading at a 36% premium to its wider peer group.
Having said all of the above, even though Reckitt, Unilever and PZ Cussons look overvalued, if youre buying with a long-term investment horizon of ten years or more, these companies should prove to be solid investments.
Its almost impossible to buy shares at a right moment, so more often than not investors will have to suffer a period of lacklustre performance before returns really start to shine through.
This is likely to be the case with Reckitt, Unilever and PZ Cussons. In the short-term theirhigh valuations will hold back share price growth.But over the long term, these companies are likely to outperform as Ive explainedbefore here.
Reckitt, Unilever and PZ Cussons yield 2%, 3.1%,and 2% respectively so investors will be paid to wait for capitalgrowth.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of PZ Cussons. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.