Let's revisit Procter & Gamble's (PG) Core Strategy: focus on its strongest brands and price reduction. Procter & Gamble continues to be the "third" child in the competitive global market behind Kimberly-Clark (KMB) and Colgate-Palmolive (CL). In this strategy, short-term earnings numbers may not reflect the desired long-term results. If this happens, investors should not be rattled. Mid- to low- priced products may have a negative impact upon the company's margins in the short term. Recovering market share in the short run through competitive pricing is one of the company's key targets in the near future.
PG continues to look into strategies for opening new markets that are very price sensitive, such as China and India. These markets are important to gain a good foothold ahead of the competition. China as an example has challenged many global companies introducing new products. Procter & Gamble learned that educational marketing is the best way too convince a societal group to try a new product. When they first introduced the Pampers brand, mothers did not see the need for the product and felt they had it covered. After P&G did some research to identify the winning qualities of a disposable diaper in China, P&G used its marketing machine to start an ad campaign. It boasted 'scientific' results, such as "Baby Sleeps with 50% Less Disruption' and 'Baby Falls Asleep 30% Faster. Pampers now ranks No. 1 in its product category.
While these changes in strategy evolve, investors are going to have to be patient and put their faith in the company. As PG looks to increase core business, the secondary product lines will take a temporary backseat because of it. This is natural since strategic initiatives must take place one step at a time. Core business comes first and afterwards, secondary levels will be addressed. Grooming, Baby and Family Care and Healthcare segments may see increased market share in the near-future. But core product focus could spell the end of P&G's "Pet Nutrition Products" segment. The recessionary environment in the west coupled with the company's cutbacks on marketing spend will probably mean segments which depend on premium-priced products, primarily Fabric Care and Beauty, could see market share decline in the future. Poor results in the third quarter could continue in the short run.
Long-Term investment in PG
As it moves sideways, investors may be wondering if the stock will continue to move up or move down. Higher highs and lower lows lead to more volatility. But when I look at the company long-term, I believe the patient investor will find a long-term investment in the stock a positive experience. The changes in strategy will pay off long-term with increased revenue as the result. But short-term numbers may not look good as a result of the changes taking place. As I mentioned earlier, secondary level sales figures may not look good in the short term but I believe it will pay off in the long run. With a 3.2% dividend, it is a reliable long-term investment to look at.
Short-Term Income Strategy
Presently trading at $70.29, I would expect a bounce off the recent high. Before a play can be initiated, I would suggest verifying the move down. Then a play can be initiated. I do not like a spread play right now because of how far apart the options are. I would initiate a direct buy of a put option.
Procter & Gamble spent most of September in the overbought position according to the RSI indicator and this tells me the stock would retract for a bit and that is just what it has been doing since the last week of September. But now it looks like the stock is consolidating before it makes up its mind what direction it wants to go. The highs look like they have plateaued as the lows continue to get lower but both the MACD and the RSI have the stock moving right in the middle at a neutral position. This is pretty common for a stock that is not really moving in any defined direction. As the stock spreads out, so do the Bollinger Bands as the bottom moves lower and the top moves higher. The stock is moving in a sideways pattern right now. The stock is neutral.
The Options Play
Buy a January 2013 put with a strike of '70' (priced at $1.33)
Net Debit to Start: $1.33
Maximum Profit: unlimited
Maximum Risk: net debit
Maximum Length of Play: 6 weeks
Reasoning behind the Trade
Short-term numbers are not a positive short-term catalyst to move the stock up.
Present pattern may call for a pullback.