We have returned to a Neutral recommendation on The Procter & Gamble Company (PG) from Underperform following the better-than-expected fourth quarter results and impressive plans to restore growth.
P&G’s fourth quarter 2012 adjusted earnings (excluding restructuring charges) of 82 cents per share came ahead of the Zacks Consensus Estimate of 77 cents as well as management guidance of 75 cents–79 cents mainly due to a lower-than-expected tax rate. Nonetheless, earnings were flat with the prior-year levels, as benefits from pricing and cost savings from restructuring activities were offset by top-line shortfall and rising commodity costs. Revenues declined 1% largely due to foreign exchange headwinds. Organically however, revenues were up 3% as pricing benefits offset headwinds from product/geographic mix and foreign exchange. The organic revenue growth was at the higher end of management guidance.
Slowdown in developed nations and commodity cost increases has resulted in a series of disappointing earnings results and guidance cuts for P&G. Other short-term headwinds include business disruptions in Venezuela, import restrictions in Argentina and negative impact of foreign exchange. However, the fourth quarter was much better than past quarters. Overall, we are encouraged by P&G’s strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess.
P&G’s products enjoy strong brand recognition and are sold in more than 180 countries around the world. P&G’s 50 Leadership Brands are some of the world’s most commonly used household names, representing around 90% of the company’s sales and profits. These 50 brands include 25 power brands each generating over $1 billion in revenues. Moreover, P&G is known for its impressive product development capabilities and marketing prowess. P&G has consistently increased market share in fast growing businesses over the years through innovation and new product launches. The company’s drive for innovation and marketing strategies allow it to expand in more categories, geographies and channels, thus boosting top- and bottom-line growth.
Further, P&G focuses on improving its product portfolio through strategic initiatives which enable it to pay more attention to its profitable businesses. In June, the company completed the divestiture of its snacks unit, Pringles, to Kellogg Company (K) to re-focus on beauty and personal care products.
P&G has a strong presence in the fast growing developing markets as the company sees sluggish growth in developed nations, principally in North America and Western Europe, due to weak economic conditions, aggressive competitive activity and market share declines. Developing markets comprise a $32 billion business for P&G, the largest developing market business for any consumer food company. Developing markets constituted about 35% of global sales of the company in fiscal 2011 and 40% of sales and 45% of volume in fiscal 2012.
Other than these, the company’s solid cash flow generation capabilities and its cost savings and productivity improvement allow for investment in product innovations, acquisitions, and brand development.
While fiscal 2012 was a tough year for P&G, the company has laid out plans to improve results in developed markets while maintaining momentum in the developing nations. Moreover, the company will increase focus on the most profitable business, its biggest innovations and further accelerate cost savings. We are encouraged by the company’s strategic plans and thus revert to a Neutral recommendation.
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