Brand names face challenge from generics

You should always stick with a name you can trust.

Or should you?


Intelligent investors who put money in the stocks of companies that make trusted brand-name consumer products have been hammered hard in 1993. It started as Philip Morris Cos. slashed prices on cigarettes to compete with fast-rising discount brands.

A panic developed, resulting in price declines in stocks of countless brand-name firms that might conceivably face generic or private-brand competition.


Some worry is justified, but not in all cases. While a few brand-name firms are no longer the trouble-free investments they once were, others are bargain-priced and their hard-earned franchises are intact. At the same time, some makers of generic products are gaining investor attention.

"Hurt most by discount brands will be tobacco and beer companies, and food companies such as Borden Inc. that don't have marketplace dominance," predicts Eric Miller, portfolio strategist with Donaldson, Lufkin & Jenrette. "Long-term growth of name-brand consumer companies won't be what it was in the 1980s, but some stocks are now fairly valued for purchase."

Some analysts believe there's a "buy low, sell high" situation in the making.

"There's been overreaction, and a lot of stocks will bounce back nicely once the investment public realizes many market segments don't have great private-label competition," predicts Terry Bivens, securities analyst with Argus Research Corp. "Campbell Soup is a fine example of a company with little private-label competition, and it's doing quite well."

The packaged food industry is the least worried.

"Because private-label and generic producers tend to be small companies that make copies of existing products that aren't as good as the originals, they won't hurt well-managed brand-name food producers," says Roger Spencer, food analyst with PaineWebber Inc.

"Growth of generics in the food industry has been flat, for there isn't the enormous price discrepancy between them and name brands, as is the case with tobacco."

Well-managed international beverage makers have strong prospects at current prices.


"Despite mounting concern over private labels increasing market share, they are not a threat to the soft-drink companies on a long-term basis," says Barry Ziegler, beverage analyst with A. G. Edwards & Sons Inc. "Brand-name soft-drink firms can make a convincing case that they're more profitable to supermarkets because of their turnover."

While Procter & Gamble Co. is cutting prices on diapers and all consumer product makers are becoming price-conscious, there's no need for alarm.

There are bargains among brand-name firms, but also companies that will have a tougher time competing.

Stocks of Colgate-Palmolive Co. and Procter & Gamble at current price levels are recommended by Miller, Bivens and Shore. PepsiCo Inc. is considered a solid long-term investment by Miller, Bivens and Ziegler.

General Mills Inc., Sara Lee Corp. and CPC International Inc. are all worth buying, Spencer believes. Hershey Foods Corp., whose stock is actually up, is another fine choice, he says.

Coca-Cola Co. is worth purchasing if its stock price slips a bit further, Ziegler adds. Quaker Oats Co. and Unilever are also good choices, says Miller.


Because they lack industry dominance, Borden and H. J. Heinz Co. should be considered potential sells, Miller believes. He also recommends selling shares of Wm. Wrigley Jr. Co., primarily because he considers them overpriced.

Meanwhile, up-and-coming firms that produce generic products are worth monitoring for future purchase.

Cott Corp., best-known for providing Sam's Choice cola to Wal-Mart stores, has seen its stock price skyrocket, though none of the analysts we spoke with are recommending it yet. Another is Perrigo Co., a strong firm in the over-the-counter private-label drug business. Ralston Purina Co., currently in the midst of a turnaround, has long made private-label breakfast cereal in addition to its brand-name products.