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PZ Cussons: a lesson in growth investing

Daniel Lane

Daniel Lane - Fidelity Personal Investing

This morning‘s half year numbers from PZ Cussons continue a downward trend for the Imperial Leather-owner, with management warning full-year revenue and pre-tax profit will be "modestly" below the previous year.


In the six months to the end of November adjusted pre-tax profit dropped around 13% to £28m on a turnover of £293.3m compared to £302.8m last time around.

And despite the company‘s expectations of a stronger second half to the year "subject to no further worsening of the economic and trading environments", the overall picture shows a steady downward staircasing in revenues and pre-tax profits over the past few years.

But aren’t household essentials a defensive play?

The ten or so years since the financial crisis were good to companies producing small ticket consumer goods with consistent customer bases. The likes of Dove soap-owner Unilever and PZ Cussons have been buoyed by investors chasing income at a time of low yields and record low interest rates, and have justified their prospects by pointing to the opportunity set available to them in emerging economies in particular.

Growing middle classes not yet using certain products, let alone brands, present the chance to create lifelong consumers, as they outsource the trappings of their social mobility to established western brands.

PZ Cussons has a strong interest in Nigeria because of this, along with Diageo through the country’s love of Guinness. Unilever has the same strategy here and in India.

And while this may be the case, the rhetoric thus far has perhaps taken for granted a steady growth trajectory in these economies, which outstrips their developed market equivalents.

PZ Cussons shows what can happen when that growth can’t make up for lower numbers elsewhere in the brand portfolio. Today’s update said revenues fell by 4.7% in the company’s European and American divisions, with a “challenging” economy in Nigeria leading revenues down 4.4%.

Investors treating these so-called defensive companies as bond-proxies over the past decade might have got used to impressive returns but it pays to actually get to grips with the long-term investment case for the businesses, regardless of the economic backdrop.

What these companies provide is a way to take part in the future of often global brands with recurring customer bases and long histories. But bumps along the way are to be expected - even if that hasn’t been on show much since 2009.

Examples like today, and Unilever’s dip at the end of last year due to a slowing market in India and destocking in West Africa, show this strategy has its challenges. But the main proponents of this style of investing know this. The likes of Fundsmith‘s Terry Smith and Lindsell Train’s Nick Train have been very open that there will be times when they won’t do as well as they have done. Smith uses the example of cycling the Tour de France - even a good cyclist isn’t built to win every stage.

And I think this is a good way to look at it. As this week has shown us, the world and the market can be extremely unpredictable so trying to guess the right time to rotate your assets between growth and value approaches is a fool’s errand.

Both value and growth strategies are available to us so that the funds in our portfolios can hand the baton back and forth between themselves over time - either suddenly, or slowly. Hitching our cart to just one thesis might work for a while but when the shine wears off we can get stuck in no-man’s land, deciding whether to stick with it or jump ship.

As personal investors we don’t have to make this choice - in fact, I recently wrote about how the UK funds on the Select 50 can complement each other rather than fight for our attention.

In the end, it’s about setting ourselves up so that we can take updates like today’s in our stride.

Look out for updates from Unilever and Diageo on Thursday.

More on PZ Cussons

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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