Conclusion: P&G (PG) looks in good shape in tough conditions. Market share is up, combined with improved margin. We reconfirm our valuation target of $73-$75 per share.
FY10 results: Sales up 3% (+4% organic) to $78.9bn (+4% Q4)-EBIT +4% (20.3% margin)-Core EPS $3.67 up +6%. Guidance F11: net sales (+4-6% organic) EPS expected to be in the range of $3.91-$4.01 up +7-9%.
Value share up 50bp
Sales growth reached +4% (organic) both for the full year and Q4.
- Growth increasingly driven by volume. Volume growth reached +4% for the year and doubled to +8% in the fourth quarter. Volume in emerging markets is booming (+12%) which was expected. The good news comes from volume in mature markets which increased 5% at a time when most competitors are struggling with lower sales (cf Unilever in Western Europe)
- Value growth held back by lower mix (-1% FY -3% Q4) and to a lesser extent pricing (-1%). Faster growth in emerging markets combined with trading down led to sharply negative mix impact.
- Organic growth accelerated in key categories in Q4, notably beauty or grooming. Fabric care and Home care is the exception with flat sales resulting from a very agressive pricing strategy.
Underlying gain in margin looks strong.
Operating margin was up 30bp for the year, despite the negative impact of higher advertising charges (+120bp).
- Gross margin rose 250bp (+50bp in Q4) providing room for manoeuvre. Costs savings in Q4 (+200bp) added to volume leverage (+100bp) more than offset negative price/mix (-200bp) and higher commodity costs (-50bp).
- We welcome the return to higher advertising spending ($1bn more in F10) in order to support a strong innovation pipeline. SG&A rose sharply in Q4, heavily impacted by marketing expenses, mainly responsible for the decline in profitability. We share management’s view that the profitability should be reviewed on a yearly basis and don’t think one should overplay quaterly variations.
Guidance F11: too high ?
Guidance of +7 to +9% EPS growth might look ambitious in light of the negative impact expected from forex and commodities this year.
- We think top line could slightly exceed F10 performance for two reasons: first, volume will be fueled by the innovations which took place late last year (new Pantene, Fusion Pro Glide..) plus the roll out of brands in new markets in oral care and skin care. Second, pricing could turn neutral for the full year (still negative in H1) as Procter will start annualizing some price decreases (batteries, detergents or paper towel in the US). Mix should continue to hold back sales impacted by further trading down.
- Gross margin could further improve helped by savings from productivity and simplification initiatives ($400m to be invested in F11) while advertising spending could remain stable as a percentage to sales.
- EPS growth will be enhanced (+2-3%) by share buy back estimated between $6-$8bn this year.
- We look for $81.7bn sales-$17bn EBIT-core EPS of $3.92 per share (+6.8%).
P&G trades at 15.8xPE based on our calendar estimates, well below its 17x average. We think that accelerating top line and bridging the gap with peers such as best in class Reckitt (RBGPF.PK) should help to rerate the stock. Our DCF suggests a valuation closer to $75 per share.