Or perhaps a better title for Procter & Gamble's (PG) earnings preview would be, "Can Ackman jump start the consumer brand giant and break it out of its lethargy ?", which is a little too long for Seeking Alpha readers, but speaks to the issue right now surrounding PG.
PG is set to report fiscal q4 earnings on Friday morning, August 3rd, 2012, (before the opening bell) and analyst consensus is expecting $0.77 in earnings per share (down 8% from the last year's $0.84 per share), on $20.26 billion in revenue (versus last year's $20.86 billion) for an expected decline in revenues of 3% year-over-year.
One good call we made off the March '09 low is not repurchasing PG shares as the worry at that time was that growth was going to come from emerging markets, and given PG's premium brand pricing, the acceptance of such was still very much a question, but also, given the state of the US consumer, it was thought that premium brands would fare less well in that environment following the worst US recession in the post WW II period.
Sometimes, you can be right for the wrong reasons, and we haven't owned the stock since - well, for quite a while, maybe 5 years - but the fact is we are intrigued with Ackman perhaps lighting a fire under a very staid and corporate consumer brand and marketing culture.
After rising above $60 in late 2009, off the March '09 stock market low, PG has traded in a flat range the last three years, between $59 on the low end and $67 on the high end, as earnings growth has stagnated: here is the progression of PG's annual earnings per share since June 30, 2009:
fiscal 2012 - $3.85 (assuming consensus is met on Friday)
fiscal 2011 - $3.95
Fiscal 2010 - $4.11
Fiscal 2009 - $4.26
While fiscal 2013 and 2014 are looking for growth, with current consensus of $4.10 and $4.46, it is just 6% and 8%, and those estimates have been coming down the last three quarters.
Consensus revenue estimates are looking for 1% - 1.5% growth over the next 4 years.
The issue is organic volume growth - the last 4 quarters its has eroded to zero after it used to be mid to high single digits in the mid 2000's. No question, the 2008 - 2009 recession changed PG's model. Where they've tried market share at any price, now they are looking for profitable market share growth, but they seem to keep missing and tinkering with the formula.
We've modeled PG's financials since the mid 1990's and the other metric that has caught our eye is stagnant cash-flow, just 3% average growth since early 2007. PG trades at 15(x) price to cash-flow (as of March 31 financials) which isn't truly expensive, but isn't cheap either.
And therein lies the rub: this consumer brand and marketing powerhouse is like a lot of other consumer brands: Coca-Cola, Nike, Johnson & Johnson, in that if you wait for a rock-bottom valuation, you are going to (possibly) wait a very long time.
So what is the solution to PG woes ? PG has 6 different segments, but Fabric & Home Care, and Baby Feminine and Family Care, represent about 50% of revenues and 65% - 70% of pre-tax income. From what i can tell from the spreadsheet, Fabric & Home Care looks to have had lower pre-tax income 6 of the last 8 quarters. Beauty Care is struggling too, the other key segment.
Like many consumer brand giants, the combination of price, volume and mix is key, and for PG, they are really leaning on "price" the last 4 quarters as volume growth has moved closer to zero. That could actually boomerang on PG, since, while the name brands like PG command pricing power, per a note out of Deutschebank following April earnings, PG's brands already have a 22% price premium to respective competitors in their niche spaces.
Still, this is a powerful consumer brand juggernaut: they might just need a shake up and a kick-start to reinvigorate the marketing prowess. Can Ackman do that - hard to say.
CEO Bob McDonald is on the ropes and might be a convenient fall guy for Ackman.
As the attached chart shows, the stock is not technically broken by any means, and even looks to be fully-valued, since Morningstar values PG at $72 per share.
Personally, i think PG can return to its halcyon days as a double-digit eps grower, but we haven't seen the catalyst yet to get us back in the stock.