Consumer staples ad spending rises

A lot of the stock action this year has been in small caps, but let's not forget the big dogs.

By Jamie Dlugosch Apr 12, 2010 3:44PM

Groceries © Tom Grill/CorbisIn the consumer staple space, stocks like Procter & Gamble (PG), Colgate-Palmolive (CL) and Kimberly-Clark (KMB) are basically forgotten -- trading up fractionally or down slightly so far in 2010.

 

But news that these consumer staple companies are ramping up advertising spending tells me they expect some solid growth.

These giants understand advertising very well and what will happen when ad spending increases.

 

It is likely that they've forecast almost to the penny how much sales can be had for a particular advertising campaign. Spending on advertising when GDP growth is negative is never a wise decision. That is why spending drops during a recession.

 

The reverse is true when GDP is growing, and it is now. Although the recession has not been declared officially dead, most, including business executives, believe that growth is returning.

 

According to the Wall Street Journal, ad spending on household products showed year-over-year improvement by 15% in January and 11% in February. Those are big numbers that are likely to generate big results for these companies in the future.

 

These moves to spend more on advertising portend good things, and the stocks are attractively priced today.

 

Procter & Gamble trades for 15 times fiscal year 2010 estimates. Colgate-Palmolive trades for 17 times 2010 estimates. Kimberly-Clark trades for 13 times 2010 estimates.

 

In addition these companies pay healthy dividends of 2.8%, 2.5% and 4.3% respectively.

 

A double digit increase in advertising expenses compared to last year can be expected to power earnings growth above current estimates. Eventually investors will discover these stocks and raise the stock price as well.

 

Investors who buy now can get in early. I like cheap stocks so of the three mentioned here I would have a bias toward Kimberly-Clark.

 

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