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P&G Maintained at Neutral

Zacks Equity Research

On May 28, we maintained a Neutral recommendation on The Procter & Gamble Company (PG), following mixed third-quarter fiscal 2013 results announced last month.

Why the Neutral Recommendation?

On Apr 24, P&G reported mixed fiscal third-quarter results beating earnings but missing out on sales. Earnings of 99 cents surpassed the Zacks Consensus Estimate of 96 cents by 3.1%. Earnings also beat management’s guidance and improved 5% from the prior-year level as strong cost savings and lower taxes made up for the sluggish revenues in the quarter.

Sales though grew year over year, were below management’s as well as Zacks’ expectations. Sales lagged despite higher innovation and marketing investments due to slower market growth and soft beauty sales. P&G’s fourth-quarter outlook was also quite subdued with earnings expected to decline from the year-ago results.

Following the less-than-impressive results in the quarter, estimates were mostly revised downwards. The Zacks Consensus Estimate for 2013 moved down by 0.5% over the last 60 days while that for 2014 declined 0.7% over the same time frame.

No doubt, P&G commands solid long-term fundamentals with strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess.

As part of its turnaround plans, P&G has laid out various strategies to improve results in the developed markets while maintaining momentum in the developing nations. The company is focusing its resources on the 40 largest and most profitable businesses, most of which are in the developed markets. These businesses account for about 50% of sales and 70% of operating profit.

The company is also focusing on driving its 20 biggest innovations like Tide Pods, Always Radiance, Bounty Trap & Lock and Bounty Unstoppables in more markets in fiscal 2013. Moreover, the company is concentrating on its 10 most important developing markets. In addition, P&G has implemented costs savings and productivity improvement initiatives in order to improve margins.

We would, however, remain on the sidelines until we witness some tangible progress from the turnaround efforts and also see some meaningful increase in organic sales. Moreover, though some signs of modest economic recovery and improving consumer confidence can be seen in the U.S., there is still great uncertainty.

U.S. consumers are burdened with higher gasoline prices, payroll tax increases and delayed tax refund checks. These external forces might restrict consumer discretionary spending in addition to slow job growth, high interest rates and tightened credit availability. The persistently sluggish European economic conditions also create an overhang.

P&G carries a Zacks Rank #3 (Hold).

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