11 Companies in 2 Days: Thoughts on the Consumer

As I have mentioned in a couple of previous posts, I had the chance to attend the Barclays "Back-to-School" conference here in Boston earlier this week.

The meetings featured some of the biggest consumer products names making formal presentations followed by Q&A on their strategies and outlook. The best part, to me, is the opportunity to meet managements in smaller settings, after their presentations, where you get the chance to ask questions and hear their thoughts in an unscripted basis.

I thought I would share some of my general observations, since I think they are both interesting as well as pretty indicative of the current economic environment.

Here's the companies I had a chance to hear: Pepsi; Church & Dwight; Avon; Colgate; Campbell's; McCormack; Boston Beer Company; Kimberly Clark; Estee Lauder; Newell Rubbermaid; and Smucker's. Unfortunately I did not get the chance to see a few other companies that I would have liked (e.g. General Mills; Procter & Gamble; Coca-Cola) but I had a couple of scheduling conflicts.

Most companies reported that sales in North America were sluggish, as was activity in Eastern Europe. Surprisingly, several executives indicated that Western Europe was showing signs of improvement. Everyone was bullish on Asia, although several indicated that their profits in China were still pretty skimpy.

Top-line revenue growth is still slow, but margins for most companies were showing definite improvement. While this is happy news for stock investors, it was not so great for the employment picture in the United States, since most of the margin and profit improvements were being achieved through a combination of using the internet as well as moving production to low-wage countries (e.g. Avon is essentially closing all of its US manufacturing in favor of sites in
countries like China and Poland).

Social media initiatives were also mentioned several times. For consumer products companies, sites like Twitter and Facebook are ideal places to reach out to consumers with new ideas of how to use their products. Estee Lauder, for example, posts beauty and fashion tips on Twitter, while Campbell's and McCormack will post new recipes on their Facebook pages.

Several companies are actively involved in M&A activity. While they obviously could not comment on their current negotiations, it was mentioned that there seems to be more activity in the last couple of months. Some of this could be related to possible changes in the capital gains tax rate in 2011, but I think a lot of the activity is related to the growth pressure that managements are feeling. If the economy is going to remain sluggish, one of the best ways to grow would be to acquire another company.

Specific company thoughts:

• I don't understand why Pepsi is changing the names of some of its most recognized products (e.g. Gatorade is now "G"). The company seems to be dominated by corporate finance people rather than consumer marketing specialists;
• Church & Dwight seemed to have the most shareholder focus, which is something I always like to hear. Still, they strongly hinted they have the capacity to make a major acquisition, and I always worry that they can harm shareholder value;
• Chuck Cramb from Avon is a changed man. A little more than a year ago he was brought in from Gillette to try to rev up the company, and he seemed to have all the answers last year. This year he seemed much more focused on cost cutting and "green initiatives", which indicated to me that they are struggling;
• I love Colgate. They have a terrific track record of innovation and long-range planning that continues to pay off for shareholders. True, their second quarter results were slightly short of Wall Street expectations, but the subsequent stock price decline represented an opportunity, in my opinion;
• Campbell's and McCormack have always been thought of as relatively boring companies, and their presentations reinforced these perceptions;
• Boston Beer Company has a smaller market cap than I typically invest in, but the company has been a real winner over the last few years. Founder Jim Koch gave his presentation while drinking their signature beer Sam Adams, and he was fun to hear;
• Kimberly Clark is too tied to wood pulp prices to offer much operating leverage to investors. Still, it seemed committed to its high dividend (currently 4.7%);
• Estee Lauder has improved tremendously since they got rid of Bill Lauder, son of the founding Lauders. The stock has had a good run but they have great opportunity in China and India - I need to look at this one more;
• I don't understand Newell Rubbermaid's strategy;
• Smucker's is one of my favorite companies. They "get" consumer marketing in supermarkets, and have a great company culture. The Smucker family remains very involved in the company, and they take evident pride in their products.