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Procter & Gamble (PG) delivered strong financial results for 2Q'13. It was able to beat the sales and EPS consensus for the quarter. The stock is currently trading near its 52 weeks high. PG currently has a forward P/E of 17.1x, above its 5 years historic P/E of 16.8x. Also, the stock offers a dividend yield of 3%, lower than its competitors as shown in the valuation table below. Therefore, I recommend investors to wait for a better entry point before initiating a buy position in the stock.

Procter & Gamble is a great company with diverse geographical outreach and strong market share worldwide. PG has a solid brand portfolio, and its top 25 brands generate more than $1 billion each in annual revenues. More than two quarters (approximately 60%) of the company revenues are earned from markets other than the U.S.

Financial Results
PG registered strong 2Q'13 results. The company was able to beat sales and earnings estimates for the quarter. PG reported net sales of $22.18 billion, up 2% YoY, beating analysts' expectation of $21.9 billion. In 2Q'13, PG was successful in expanding its market share in markets which account for 50% of total sales. Emerging and BRIC markets sales grew by 7% and 11%, respectively. Also, PG posted strong quarterly earnings per share of $1.22, beating analysts' consensus of $1.11. Recent quarter earnings were up 12% YoY. Moreover, PG experienced noticeable margin expansion as shown in the table below.

2Q'2012

2Q'13

Gross Margin

50.1%

51.2%

Operating Margin

19.9%

21%

Net Margin

7.9%

18.3%

Source: Quarterly Report

All 5 reporting segments of the company delivered strong results for the quarter evident by the fact that all segments enjoyed organic sales growth of 2% or more. The following table shows organic volume and sales growth for 2Q'13.

Organic Volume Growth

Organic Sales Growth

Beauty Segment

0%

3%

Grooming Segment

0%

2%

Health Care

3%

4%

Fabric and Home Care

2%

3%

Baby Care Segment

6%

5%

Source: Quarterly Report

Guidance
PG has delivered healthy results in the last couple of quarters mainly due to productivity gains and cost savings and has increased its core EPS guidance for fiscal year 2013 to $3.97 - $4.07, representing an increase of 3% - 6% as compared to same period last year. The company is expecting organic sales growth in a range of 3% - 4% for fiscal year 2013, whereas foreign exchange is expected to have an adverse impact of 2% on the top line.

For 3Q'13 (January to March 2013) PG is anticipating net and organic sales growth of 3% - 4%, whereas core EPS is expected to remain in a range of $0.91 - $0.97 representing an increase of -3% to 3% YoY. For the next quarter, analysts expect sales and EPS figures of $20.9 billion and $0.96 respectively.

Also, analysts anticipate a healthy growth rate of 7.8% per annum for the next five years. Following are the mean EPS estimates by the analysts from 2013 to 2016.

2013

2014

2015

2016

EPS Forecast

$4.06

$4.38

$4.7

$4.96

Source: Nasdaq.com

Dividend and Share Repurchase

PG has a decent dividend yield of 3% and has increased its dividends over the years. The durrent dividend offered by the company is believed to be sustainable as in recent years, and free cash flow and dividends display a healthy relationship. Following charts show the relationship between free cash flow and dividend and separately show dividend increases over the years.

(click to enlarge)
Source: Annual reports

(click to enlarge)
Source: Ycharts.com

Other than sharing its successes in the form of dividends, PG is also pursuing a share repurchase program. It has increased its share buyback outlook for 2013 to $5 - $6 billion from a previous target of $4 - $6 billion.

Valuation
PG stock is currently trading at $75.08, near its upper end of 52 week range of $59.07 - $75.48. It has past five years average P/E of 16.8x, and forward P/E of 17.1x. I believe the stock is slightly overvalued at current the price of $75.08. Using its five years historic P/E of 16.8x and 2013 EPS estimate of $4.06, I calculated a price target of $69. I recommend investors to wait for a better entry point to buy PG stock.

PG

Unilever plc (UL)

Kimberly-Clark Corporation (KMB)

Forward P/E

17.1x

17x

14.7x

PEG

2.4

3.4

1.6

Dividend Yield

3%

3.2%

3.4%

Source: Yahoo Finance

Source: Procter & Gamble: A Great Business But Slightly Expensive At Current Valuations