There is logic in finding opportunity in dire projections as may companies are lowering estimates for the year and some into 2013. Procter & Gamble (NYSE: PG) is just one of these companies that I see slowing down. An opportunity opens up to us on a short term income play while the stock slows down on lowered expectations from management.
Global Outlook Notes
Procter and Gamble (as well as other international companies) is starting to prepare investors for "less than stellar" earnings calls. Companies like P&G are talking about the uncertainty with the global economy. Expectations for the 95% of companies still to report results continue to come down! Earnings overall are only expected to increase by 0.6% from the same period last year while growth expectations have been trimmed 2.3% just from the end of May and 5% since the beginning of earnings season last quarter
Lowering Expectations and a Price Perception Needing Addressed
It lowered its financial forecast for a second time in three months with plenty of negative response. Just in June, at a Deutsche Bank (DB) conference, Proctor & Gamble management revised its guidance for fiscal 2012 downwards and provided a lower than expected outlook for the fiscal 2013. The news coming out has not done much to restart the stock in an upward direction. It has a lot to struggle with. One of the problems it is having is with price perception. It is a price point that appears higher than competitors. Here is a simple example:
Crest Complete, 8 ounces, is $3.57 or about 44.6 cents an ounce. Colgate Palmolive's (NYSE: CL) Total, 6 ounces, is $2.96 or about 49 cents per ounce. On the shelves there were no 8 ounce size Colgate toothpastes. Therefore, the Crest prices appear significantly higher even though it isn't.
The long term chart tells it all. I expect the stock to continue to move down now. I cannot say exactly when this will take place but from the long term negative divergence I see in the stock at present, I believe it has peaked. While it is moving in a long term peak and valley pattern, I expect it to do the same but with a more bearish hint.
(click to enlarge)
The Options Play
With no significant catalyst available in the short term, I will continue to look at the stock with bearish to neutral eyes. I am looking at a long term bearish income strategy on this one because of the peak & valley pattern I continue to see. The stock is presently trading at 61.64.
- Buy an October 2012 put (ITM) with a strike of '62.50' (priced at $3.20)
- Sell an October 2012 put with a strike of '60.00' (priced at $1.85)
- Net Debit to Start: $1.35
- Maximum Profit: $1.15
- Maximum Risk" net debit
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Sales continue to shrink.
- Revised EPS clear through 2013 continue to bring out the bears.
- There is no immediate catalyst to make the stock turn around.
