I absolutely love consumer goods stocks! Unilever (ULVR) is one of my core holdings and I just bought into flower foods (NYSE:LFO).

I love Consumer good stocks because they are generally very defensive and predictable investments. After all, even in recessions people still need to eat, drink and clean.

Stocks in this sector also boast superior margins, as the value of their brand mean that customers are willing to pay that much more.

What would you pay more for, Unilever’s Ben and Jerry’s or a Tesco copycat?

Consumer goods stocks in today’s market

With low interest rates people have been buying these defensive stocks for their dividends, which trump measly bank account rates.

High demand for these stocks have left them at high p/e ratios. For example;

Proctor and Gamble (PG) sports a p/e of 25

Unilever of 24.1

Colgate Palmolive (CL) of a whopping 48!

Even at these high valuations the stocks continue to climb and even Procter and Gamble whom are struggling with growth are up over 16% year to date.

With such high valuations I often sit back and watch momentum and demand drive these stocks higher, waiting patiently for an opportunity.

One stock that I have my eye on is Reckitt Benckiser (RB), a British consumer goods company that specialises in health and hygiene products.

Its rapid growth and impressive portfolio of products has caught my eye.

The company owns internationally recognisable brands such as Durex, Dettol, Clearasil, Veet, Strepsills and Scholl. With such a great portfolio of products I felt the need to take a closer look at the stock’s fundamentals;

Growth

Reckitt Benckiser’s sales growth has been impressive as of late with year end results for 2015 showing a further 6% growth in like for like sales at the company. What I love most about this company is it portfolio of Health products, which people will buy regardless of pressures on disposable income.

The growth in revenue from its Health division continues to be strong with a 14% like for like growth in2015.

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But, as we can see from this tablefrom the company’s 2015 annual results this growth seems to be a tale of two halves.

The company’s Health segment continues to perform strongly but there are certainly signs of weakness in their home division and portfolio brands – investors should be aware of this.

Whilst Home and Portfolio brands make up a minority % of sales, further weakness in these divisions could neutralize (or certainly damage) the impressive growth in the health division.

We can somewhat see this concern play out in the EPS figures – EPS growth has not been strong with an average growth rate of only approx 1.6% since 2012. The company’s turnover has actually declined over the past few years from £9.485m in 2011 to £8,875m in 2015.

Dividend

The company has paid a dividend since 2008 and has managed to increase its payments by 84% since then. The company’s payout ratio for 2015 was also a comfortable 54% meaning that there is room for dividend growth if EPS stay flat. Dividend yield based on 2015 year earnings is an anemic 1.9%

Value

With no major red flags concerning the company thus far, it’s time for me to burst your bubble.

RB is not a buy!

I feel that this company is grossly overvalued, especially compared to its peers such as ULVR.

Looking over the past five years, we can see that the stock has an average 5-year p/e ratio of 20.2. But today we can see that the stock is trading hands for 30.8x earnings.

Even if we take the highest estimate for 2016 earnings of 301p per share the stock is still trading hands for 24.7 times earnings.

The 30.8 p/e ratio means the market is pricing this stock for some serious growth, something it has failed to deliver over the past five years. Yes, the growth in certain divisions is impressive but we must look at the company as a whole.

I was really interested to see what a dividend growth model valuation would give as a fair price for Reckitt Benckiser and I decided to be generous with my estimations too.

I factored in a 8% discount for the risk of our capital (As it’s a pretty steady earning stock in a great sector), and assumed that the company would grow its dividend by 6% annually (above its average 5 year growth rate of 3.85%).

Even with my very generous and optimistic figures the stock came in at a fair value of – 6,950p a share. Meaning that by my estimations the stock is at least 15.3% over-valued at present.

Summary

Reckitt Benckiser is a brilliant company that is powering ahead with the growth of its Health division. In an uncertain world it makes sense to invest in companies that have a great portfolio of essential health products that people will always need to buy. I’m confident that management can continue to deliver growth in this segment but the decline in their portfolio brands puts a question mark on the degree of overall EPS growth moving forward.

At a lower valuation I’d certainly roll the dice a bit and feel confidence that the intrinsic value I’d be getting would make any disappointment acceptable (relative to the price I paid). But, this company is priced for significant growth and that is far from certain.

If the company does indeed grow as projected then I expect the price to continue to climb higher, sustaining its current momentum which makes the stock unappealing in terms of valuation and yield. But, one slip will certainly lead to troubling times for the share price and ,hopefully, a buying opportunity for me!

Advice: Avoid at these prices, but keep an eye out.

Disclosure: I am/we are long ULVR, FLO.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.