We have maintained a Neutral recommendation on The Procter & Gamble Company (PG) encouraged by solid first quarter fiscal 2013 results and the company’s turnaround efforts.
P&G’s first quarter earnings of $1.06 were significantly better than the Zacks Consensus Estimate and improved 5% from the prior-year level. The earnings upside was driven by organic sales growth, lower commodity cost headwinds and improved productivity.
The consumer products giant’s net sales dropped 4% to $20.74 billion in the quarter. However, improved market share trends in its U.S. markets let sales to be at the favorable end of management expectations of a shortfall of 4% to 6%.
Slowdown in developed nations and commodity cost increases had resulted in a series of disappointing earnings results and guidance cuts for P&G. However, first quarter 2013 as well as the fourth quarter 2012 results came in much better than the past quarters. Following the impressive results in the first quarter, P&G maintained its organic sales growth and core earnings guidance for fiscal 2013.
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 that generate $1 billion to over $10 billion in sales annually. 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.
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. The company is working on this strategy by focusing on affordability, accessibility and brand awareness and is localizing production in developing countries to improve margins. Developing market sales have grown at a compounded average growth rate of 12% over the last 12 years.
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. However, we would prefer to wait and see if the plan is effectively executed. Thus, we have a Neutral recommendation on the stock. The stock carries a Zacks #2 Rank (a short-term Buy rating). A peer company Kimberly Clark Corporation (KMB) also carries the same rank.
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