Procter & Gamble Tops Wall Street in Management Feat

It is rare to consider a $200-plus billion capitalization stock as nimble, but Procter and Gamble’s (PG) most recent quarterly performance could aptly be described as such. In this case, a difficult operating environment with slowing consumer spending and greatly higher input prices was confronted by PG management, who raised prices as well as trimmed what costs they could. The results were earnings that exceeded Wall Street analysts’ expectations. The Street had expected Procter and Gamble to earn 78 cents per share on just over $21 billion in revenue, while the actual results were 80 cents per share (excluding a 12 cent one-time tax gain) on $21.27 billion. Net income surged ahead 33% over the fourth quarter a year ago and revenues grew at a healthy rate of 10%.

Inflation of input prices in the quarter —particularly the sky-rocketing price of oil—have proven to be a major challenge to Procter and Gamble and competitors such as Kimberly Clark (KMB). Procter and Gamble are expecting to spend $3 billion more on commodities costs in the new fiscal year. Estimates have pegged commodity prices as more than half the total cost of goods sold, so it is not difficult to understand why gross margins fell 160 basis points from 50.8% to 49.2%.

Management has made clear that price increases have been made necessary in this environment. Even though their prices have gotten more expensive, they were still able to grow revenues at a very respectable clip. PG attributes 3% of the revenue growth to the higher prices, and also a weak dollar has helped expand sales abroad to the tune of 6%. The company sales in 2006 were 53% outside of the U.S. and an aggressive strategy towards emerging markets is likely helping to stabilize the company during U.S. downturns.

It does not take a rocket scientist to know that when input prices are increasing rapidly, the company will need to hike up the price of its products. However, we were impressed by management’s ability to turn that theory into practice while increasing sales and not alienating cash-strapped consumers.

What is even more impressive to us is the company’s steadfast adherence to growth. As I touched on earlier, many large companies can become lumbering and change course about as fast as an aircraft carrier. PG management is not afraid to shed slower growing segments of their portfolio of products. For example, Folger’s is a strong brand but that division had been greatly impacted by the increasing price of coffee beans. Procter and Gamble had set targets for Folger’s to grow revenues at 4%-6% per year, and PG was disappointed by the unmet goals and did not hesitate to sell it off for nearly $3 billion to Smuckers (SJM). PG now has the cash to look for a possible acquisition that will be more in line with their growth goals.

We believe that PG is actually pretty fairly valued at current levels. The current valuation metrics of price-to-sales and price-to-cash are both within their historically normal ranges. We have been impressed by the management of Procter and Gamble, which, within our analysis, is a major plus. Earlier this week, we downgraded PG from a BUY to a HOLD rating, but for those investing with a long term time frame, we would take heart in the commitment to growth and the demonstrated effectiveness of PG’s management in the most recent quarter. The stock is trading up about 3% after the results, as the results were strong but management offered fairly conservative guidance for the quarters ahead.

Comments

[Jamie:]

Just a thought for analysts: If you're going to cover a stock, can you learn to spell the name of the company correctly?

2008 Aug 06 08:39 AM

[truthinvesting:]

Commentary was spot on. I dont personally care about spelling.On my free website with documented double digit returns this year P&G was a buy .I agree that at tehse levels there are better opportunities but as the author sttes this is a great company with GREAT management

2008 Aug 06 08:46 AM

[CrossProfit:]

Jamie,
Obviously the author feels that they are a qualified proctor to gamble with other peoples money :-)
Just kidding.
Proctor as a misspelled Procter is a common recurring mistake. The author has spelled the name correctly in the past.

2008 Aug 06 10:28 AM

[truthinvesting:]

This stock is part of my profitable bargain bin thread on free website and the 30 BILLION dollar buyback management has in gets little ink but is very significant

2008 Aug 09 09:44 AM