Procter & Gamble: Financial Analysis for the December 2010 Quarter

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We have updated the various financial metrics we use to analyze Procter & Gamble's (NYSE:PG) Cash Management, Growth, Profitability and Value. This post reports on the metrics and the associated financial gauge scores.

The metrics were calculated using data from P&G's current and historical financial statements, including those in the latest 10-Q.

A previous article examined in some detail P&G's Income Statement for the December-ending second quarter of fiscal 2011. The company earned $1.11 per diluted share on a GAAP basis, down 26 percent from $1.49 in the same three months of the previous year.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Procter & Gamble creates and markets many well-known Household and Personal products to customers around the world. The company, based in Cincinnati, traces its roots back to 1837.

P&G reported Net Income of $12.7 billion ($10.9 billion from continuing operations) on Net Sales of $78.9 billion in fiscal 2010, which ended in June.

The company's market value is currently close to $200 billion on a fully diluted basis, which makes P&G one of the ten most-valuable U.S. corporations.

Having raised its dividend for 54 consecutive years, P&G has certainly earned its place on the list of S&P 500 Dividend Aristocrats. P&G is also number 6 on Fortune Magazine's 2010 list of the World's Most Admired Companies.

P&G has three global business units: Beauty and Grooming, Health and Well-Being, and Household Care. Each GBU comprises two segments.

With such a broad product line, P&G has a lengthy list of competitors. Colgate-Palmolive (NYSE:CL), Kimberly-Clark (NYSE:KMB), and Unilever (NYSE:UL) are a few of the better known rivals. Consumer products compete at large and small retailers on price, quality, features, and marketing. P&G has long been a top advertiser.

In the last decade, P&G has made an effort "to extend the availability and affordability of P&G brands to more low-income consumers, particularly in developing markets." In 2009, 32 percent of the company's total sales were in developing markets, up from 20 percent ten years earlier.

Now we turn to the financial gauges. The latest quarterly results produced the following changes to the scores:

  • Cash Management: 16 of 25 (down from 17 in September)
  • Growth: 6 of 25 (down from 11)
  • Profitability: 7 of 25 (unchanged)
  • Value: 1 of 25 (down from 6)
  • Overall: 25 of 100 (down from 37)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

After selling its pharmaceuticals business to Warner Chilcott (NASDAQ:WCRX), P&G restated some historical financial statements to depict the pharmaceutical results as a discontinued operation. We used the latest numbers when computing the financial metrics listed below.

Cash Management 31 Dec 2010 30 Sep 2010 31 Dec 2009 5-Yr Avg
Current Ratio 0.8 0.7 0.9 0.8
LTD to Equity 32.9% 34.0% 32.4% 35.9%
Debt/CFO (years) 2.4 2.4 1.8 2.6
Inventory/CGS (days) 65.3 65.6 71.7 69.8
Finished Goods/Inventory 62.3% 63.7% 64.6% 66.4%
Days of Sales Outstanding (days) 27.9 27.7 29.8 30.5
Working Capital/Revenue -5.5% -5.2% -9.8% -5.6%
Cash Conversion Cycle Time (days) 34.8 34.8 46.0 50.5
Gauge Score (0 to 25) 16 17 15 8
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The Cash Management gauge slipped one point as a result of minor changes to the underlying metrics.

In the December quarter, the Long-term Debt-to-Equity ratio edged down as LTD was trimmed from $21.5 billion to $21.3 billion. Shareholders' Equity also rose due to earnings.

Short-term debt (i.e., obligations due within one year), which jumped to $11.5 billion in the September quarter, eased to $11.2 billion in December. Total Debt was steady relative to Cash Flow from Operations.

P&G's Inventory became slightly leaner, and a 6.4-day decline in the Inventory/CGS ratio over the course of the last year is rather remarkable. The lower percentage of Finished Goods is also positive.

Days of Sales Outstanding and the Cash Conversion Cycle Time, which are related measures of cash management efficiency, were nearly unchanged.

Although it's not appropriate for every company, P&G's ability to operate with negative Working Capital can also be viewed as sign of efficient use of Cash.

Growth 31 Dec 2010 30 Sep 2010 31 Dec 2009 5-Yr Avg
Revenue Growth 3.6% 4.9% -4.5% 2.0%
Revenue/Assets 59.0% 58.3% 56.1% 56.2%
Operating Profit Growth 2.0% 1.5% 6.1% 3.5%
CFO Growth -20.9% -12.9% 26.2% 2.0%
Net Income Growth 2.3% 3.9% -3.1% 5.1%
Gauge Score (0 to 25) 6 11 6 9
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Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters. The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.
The Growth gauge tumbled, giving up its gains over the last year.

Revenue and Net Income growth rates, on a trailing-year basis, both weakened when compared to the comparable growth rates after the September 2010 quarter.

Cash Flow from Operations declined dramatically.

One reason for the lackluster growth rates is that P&G has divested certain businesses. Conversely, asset disposals seem to have contributed to the improvement in the Revenue-to-Assets ratio.

Profitability 31 Dec 2010 30 Sep 2010 31 Dec 2009 5-Yr Avg
Operating Expense/Revenue 80.3% 79.7% 79.1% 79.9%
ROIC 12.6% 12.3% 12.1% 11.9%
Free Cash Flow/Invested Capital 11.1% 11.5% 14.5% 11.6%
Accrual Ratio 1.1% -0.2% -3.0% -0.3%
Gauge Score (0 to 25) 7 7 11 8
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The Profitability gauge held steady.

Declining Cash Flow (mentioned above) had a minor negative impact on the FCF and Accrual Ratios.

Although P&G has had some success improving its Gross Margin, the overall Operating Margin has been stuck at about 20 percent (i.e., operating expenses take $0.80 of every sales dollar). The company has been willing to spend to grow market share and to support new products.

The improvement in the Return on Invested Capital during the last year was smaller than we might have expected.

Value 31 Dec 2010 30 Sep 2010 31 Dec 2009 5-Yr Avg
P/E 17.3 14.5 14.5 17.9
P/E vs. S&P 500 P/E 1.2 1.0 0.7 1.1
PEG 8.5 9.4 2.4 2.3
Price/Sales 2.4 2.3 2.5 2.6
Enterprise Value/Cash Flow (EV/CFO) 16.4 15.2 12.6 17.0
Gauge Score (0 to 25) 1 6 14 8
Share Price ($) $64.33 $59.97 $60.63 -
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The Value gauge fell sharply because of increases in the P/E and EV/CFO multiples. A surge in P&G's share price contributed to the expansion.

The Price/Sales ratio has been fairly static.

It will take more robust Revenue growth and the resumption of Cash Flow growth to impel the Value score higher.

Overall 31 Dec 2010 30 Sep 2010 31 Dec 2009 5-Yr Avg
Gauge Score (0 to 100) 25 37 49 32
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The Overall gauge tumbled on weakness in the Growth and Value gauges. Share price rises while growth is ebbing will have this effect. The decline in Cash Flow from Operations, which may be due to asset divestitures and increases in Working Capital, has also put negative pressure on several of the scores.

Disclosure: No position in PG at time of writing.