Procter & Gamble: Not Much Room For Short-Term Upside

 |  About: The Procter & Gamble Company (PG)
by: The Value Investor

Shares of Procter & Gamble (PG) rose 2.9% on Thursday. The packaged consumer goods company reported its first quarter results before the market open.

First Quarter Results

Procter & Gamble reported first quarter revenues of $20.74 billion, down 4% on the year. A strong dollar impacted revenues by 6%. On average, analysts expected the company to report revenues of $20.78 billion.

The company boosted its gross margins by 80 basis points on higher pricing and manufacturing savings. General and administrative expenses fell by 10 basis points, excluding one-time items. The job cuts announced during the summer, already had a positive impact on margins.

Core earnings per share rose 5% to $1.06 per diluted share. Net earnings fell by 5% to $0.96 as the company took a $0.10 charge. The company reported a GAAP net income of $2.85 billion, compared to a profit of $3.00 billion last year. Earnings of $1.06 beat analysts consensus of $0.96 per share.

CEO and Chairman Bob McDonald commented on the results,

Our first quarter results put us on track to deliver our commitments for the fiscal year. Results were at the high end of expectations on the top line and ahead of plan on operating profit, earnings per share and cash. We are continuing to focus on executing our growth and productivity strategy - maintaining momentum in developing markets, building a strong innovation pipeline, and aggressively driving costs savings and productivity improvements. We're confident that this strategy will enable P&G to generate superior levels of shareholder return in both the short- and long term.

Segmental Information


Net sales for the beauty division fell by 7% to $4.94 billion. A three percent decline in volumes and a 5% impact from unfavorable exchange rates was partially offset by a 2% increase in prices. Volumes were down as the company lost market share amidst increased competition. Net earnings for the division fell 4% to $658 million.


Revenues for the grooming division fell 7% to $2.01 billion. Shave care performance was heavily impacted by an 8% unfavorable impact of foreign exchange rates. Volumes were down 1% on the back of increased competition and a three percent increase in pricing. Net earnings for the division fell 4% to $466 million.

Health Care

Revenues for the health care division fell 4% to $3.17 billion. A similar story for the health care division as foreign exchange rates shaved off 6% of total revenues. Volumes were down one percent, and prices where up two percent. Net earnings fell some 6% to $507 million.

Fabric Care & Home Care

Revenues for the fabric care and home care division fell 2% to $6.90 billion. Flat volume growth and a two percent increase in pricing was offset by exchange rates which impacted sales by 5%. Net earnings for the division rose by 10% to $903 million.

Baby Care & Family Care

Revenues for the baby care and family care division fell 2% to $4.00 billion. A three percent increase in pricing and a two percent increase in volumes were offset by the effects of a strong dollar. Earnings for the baby care division rose 4% to $512 million.


Organic sales growth for the current quarter is expected to come in between one and three percent. Foreign exchange rates are expected to reduce sales by two percent. Core earnings per share are expected to come in between $1.07-$1.13 per diluted share. This compares to last year's core earnings of $1.09 per share. On average, analysts expected the company to guide for earnings of $1.10 per share.

Reported earnings per share are expected to come in between $1.18-$1.25 per share as the company expects to report a $0.17 gain related to the purchase of the remainder stake in Feminine Care joint venture in Iberia, partially offset by some restructuring charges.

For the full year of its fiscal 2013, Procter & Gamble maintains its organic sales guidance of growth between two and four percent. Foreign exchange is expected to reduce sales by two to three percent. Core earnings are expected to come in between $3.80-$4.00 per share, which compares to 2012s annual core earnings of $3.85 per share. On average, analysts expected the company to earn $3.91 per share.


Procter & Gamble ended its first quarter with $5.3 billion in cash and equivalents. The company operates with $31.9 billion in short and long term debt, for a net debt position of $26.6 billion.

For its fiscal 2013, the company is on track to generate revenues of roughly $85 billion. Core earnings per share could come in around $3.90 per share for the full year.

The market currently values, Procter & Gamble at $191 billion. This values the firm at 2.2 times annual revenues and 18 times core earnings.

Currently, Procter & Gamble pays a quarterly dividend of $0.5625 per share, for an annual dividend yield of 3.2%.

Investment Thesis

Year to date, shares of Procter & Gamble are trading with modest gains of 4%. Shares fell from $66 in January to lows of $59 in June after the company lowered its outlook. Shares rose after activist investor Bill Ackman put pressure on the company.

Over the past five years shares are trading largely unchanged. The company grew its revenues from $76.7 billion in its fiscal 2009 to an expected $85 billion in 2013. Net income fell from $13.4 billion in 2009 to $10.8 billion in 2012. The company retired some 7% of its shares outstanding since that point in time.

The dismal operating performance, especially in terms of profitability, resulted in a stagnating share price in recent years. CEO Bob McDonald has come under continued pressure from hedge fund investor Bill Ackman. In a response, the company cut 10% of the company's staff in an attempt to save $10 billion through 2016.

The company remains on track to meet its cost saving targets. Procter & Gamble announced that 4,200 jobs will be cut by the end of October and another 1,500 jobs will be cut by the end of this fiscal year. While job cuts are good for margins and earnings, there were some disappointments. In China the company only grew its revenues by 7% while the rest of the market grew 11%.

I remain on the sidelines. While the company is being pushed into value-creating measures, under pressure of Bill Ackmann, I see limited upside. Procter & Gamble could boost annual earnings by some $3 billion per annum as a result of cost savings. Even then, shares are valued around 15 times annual earnings.

For investors searching for current dividend yield with upside potential, an investment in Procter & Gamble will most likely pay off over the long term. I see few triggers for short to medium term price gains after shares have rallied from $60 in June to $70 at the moment.

I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.