Last week, Goldman Sachs warned that as grocery shopping is increasingly conducted online, the big brands from Unilever (LSE: ULVR) would find tougher competition from rival brands. Online supermarkets are not limited by shelf space and have huge distribution centres, which allow them to stock a wider range of products, allowing more competition between products.
With increasing competition, the big food and homecare brands from Unilever and Reckitt Benckiser (LSE: RB) are likely to see slowing sales growth and margins compression. Already, sales growth has already slowed considerably, with food and homecare brands being the slowest categories of both businesses.
Brands vs white label
McBride (LSE: MCB) supplies retailers with private label household cleaning and personal care products. In a highly commoditised market, McBrides 3.4% operating margin is a far cry from the double-digit margins that Unilever and Reckitt enjoy.
Suppliers of white-label products compete heavily on price, but McBride tries to differentiate itself by investing in new product formulations. As consumers move away from the big brands, McBride is in a strong position to capture more market share.
McBride already owns a small range of its own-branded products, including Ovenpride and Limelite, and this could be an opportunity for the company to grow its presence. Consumers,whohave become increasingly price conscious, should become more willing to switch from the well-known brands to cheaper alternatives.
Growth rates and valuations
Shares in Unilever trade at a forward P/E of 21.5 on expectations that underlying EPS will grow 13% this year to 130.8 pence. In the following year, earnings growth is predicted to slow to 7%, and this should mean Unilevers forward P/E should fall to 20.0, based on its 2016 underlying EPS of 140.1 pence.
Reckitt has even higher earnings multiples. Its forward P/E ratios are 25.0 and 23.3 on its expected 2015 and 2016 earnings, respectively. This is in spite of its slower pace of expected earnings growth. Underlying EPS is only forecast to grow 3% this year, to 240.6 pence, before accelerating to 7% in 2016. Reckitts more expensive valuation is most likely down to its higher operating margins and historically faster earnings growth.
McBride, which lacks the brand power of its much larger competitors, seemsfar cheaper. Its forward P/E is 15.0 on expectations that underlying EPS will soar by 52% to 8.0 pence. For 2016, analysts forecast another 21% growth in underlying EPS, which means its forward P/E based on its expected 2016 earnings will fall to just 12.0.
McBride is my best pick
McBride has the cheapest valuation and fundamentals for the company are looking up. The structural shift in grocery shopping moving online and consumers becomingincreasingly price-conscious shouldlead to the increasedpopularity of its products.
My second choice would probably go to Unilever, as it has a slightly cheaper valuation and is less heavily exposed to food and homecare products. Food and homecare products account for around 45% of Unilevers sales, whilstthese products account for some 68% of Reckitts sales.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.