Though this mature sector is unlikely to grow much faster than the general economy, relatively static demand for food, beverage, household, and tobacco products can add up to fairly steady performance. Further, many of these companies enjoy the benefits of wide economic moats—sustainable competitive advantages that translate into pricing power and profitability. Though companies in this sector may seem staid and boring, without the thrills of more risky categories, we like the stability, relatively low risk, and, importantly, generous free cash flows.
• Find companies that enjoy the cost advantages of manufacturing on a
larger scale than most other competitors. One related issue is "whether the
firm holds dominant market share in its categories.
• Look for the firms that consistently launch successful new products—all
the better if the firm is first to market with these innovations.
• Check to see if the company is supporting its brands with consistent ad
vertising. If the firm constantly promotes its products with sale prices, it's
depleting brand equity and just milking the brand for shorter-term gain.
• Examine how well the firm is handling operating costs. Occasional re
structuring can help squeeze out efficiency gains and lower costs, but if the firm is regularly incurring restructuring costs and relying solely on this cost-cutting tactic to boost its business, tread carefully. Because these mature firms generate so much free cash flow, it's important to make sure management is using it wisely. How much of the cash is turned over to shareholders in the form of dividends or share repurchase agreements?
Keep in mind that investors may bid up a consumer goods stock during economic downturns, making the shares pricey relative to its fair value. Look for buying opportunities when shares trade with a 2O percent to 30 percent margin of safety.
