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After picking up momentum in the second quarter and raising its dividend in recent weeks, consumer products giant Procter & Gamble (PG) announced mediocre results. Revenue grew only 2% year-over-year to $20.6 billion, falling below consensus estimates. Earnings were slightly stronger than consensus expectations, with core earnings per share increasing 5% year-over-year to $0.99. The firm also announced it will increase its share buyback program to $6 billion-near the high end of the previously announced range.

Core gross margins expanded 20 basis points year-over-year to 50% as initiatives in manufacturing and productivity yielded positive results. We'd like to see the firm push this number a bit higher, but it seems its price increases have been offset by product mix shifts. In our view, the primary disappointment during the quarter was the firm's inability to sustain volumes with price increases. Beauty and Grooming, for instance, both increased prices, but saw net sales losses of 2%. Core SG&A expenses rose 10 basis points year-over-year to 31.2%. Increased marketing spending put upward pressure on costs. For the time being, we think management implied that marketing spending will be elevated as the company cuts overhead in other areas to spend on new product awareness.

On a segment basis, we saw solid performance out of healthcare as toothpaste market share gains helped drive strong results. Organic sales jumped 8% year-over-year driven by strong volume increases in developed and developing markets (Image Source: P&G). A strong flu and cold season in the U.S. and Latin America also helped propel sales, though it's important to note that this quarter was seasonally strong while the year prior quarter was seasonally weak.

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The aforementioned beauty and grooming segment was lackluster, though "core" sales were a touch higher than reported sales. Beauty in particular was fairly weak across the board, and we think the segment will only continue to become more competitive. P&G, in our view, will invest heavily in an effort to maintain market share, but we think it could be an uphill battle. Grooming's biggest challenge remains slow global economic growth, which has incentivized customers to trade down. Value share in Blades and Razors increased 1 percentage point in the U.S. as well as in Western Europe. Competitors such as DollarShaveClub.com have emerged, but we think the segment will continue to perform well.

The baby and family care segment's consistent performance endured during the third quarter. Revenue grew 3% thanks to 2% gains in both pricing and volume, offset by a 1% impact from currency fluctuations. After-tax earnings increased 6%, and the firm increased value share in diapers in the U.S. and China. With parents obsessed with safety, efficacy, and trust of products, we think the baby care business possesses one of the strongest competitive advantages within P&G's various business lines.

After price increases failed to stick with consumers, fabric and homecare benefited from bringing new products to market. P&G's brand portfolio in fabric care has resonated with Chinese consumers as evident by a double-digit growth in volumes in the country. This trend is likely to continue, in our view, though it may be difficult for the company to raise prices.

Going into the fourth quarter, P&G lowered the low end of its guidance range for core earnings per share to $3.96-$4.04-slightly disappointing but not material to our valuation. Organic sales guidance of 3%-4% remains unchanged, but the firm did increase its buyback and raised its dividend earlier this month.

Overall, we know P&G isn't the most exciting company, but the firm has improved free cash flow year-to-date, up 21% year-over-year to $8 billion. Management's focus on cutting costs while bringing new products to market has worked for much of fiscal year 2013, and we believe the firm could experience some pricing upside if and when global economic growth accelerates. Since shares trade near the high end of our fair value range, we aren't looking to put new capital to work in the name at this time. However, we are holding on to our position in the portfolio of our Dividend Growth Newsletter.

Source: Procter & Gamble's Third Quarter Stalls