Procter & Gamble (PG) last week reported better than expected results for the first quarter of fiscal year 2013. These results can be viewed as the beginning of a positive momentum in the company's performance. We expect the company to deliver improved results in upcoming quarters as well. Recent quarterly results helped relieve the pressure on the company's CEO who has been criticized for the company's weak financial performance in recent years. However, Warren Buffett's Berkshire Hathaway Inc. (BRK.A) has sold some of its holdings in PG. Buffett has stated that he does not have the answer to the company's earnings woes.
Procter & Gamble is among the biggest multinationals of the world. The company has a market for its products in more than 180 countries. Developed markets' growth has been stagnant whereas emerging markets have been the main growth drivers for the company. PG has annual revenue of around $84 billion, out of which 38% is earned from emerging markets. Contribution from emerging markets is expected to grow as the company shifts its focus towards them. The company is at present targeting ten developing markets.
PG reported its first quarter results for fiscal year 2013. Reported earnings for the quarter were better than expected whereas revenue narrowly missed expectations. Core EPS for the quarter were $1.06, up 5% YOY. Analysts were expecting core EPS to be $0.96. Revenues were $20.74 billion, down 4% YOY. A positive take away from the top line was that the company experienced organic sales growth of 2% in the quarter. As the company has significant international exposure, the strengthening of the dollar cut its total revenues down by 6%.
Looking at the results of different segments, we observe healthy signs with regards to the company's performance. Out of five business segments, four experienced organic sales growth. The table below shows the performance for the quarter of the different business segments.
Source: Earnings release.
In order to experience growth and improve upon its operations, the company is expected to focus on 20 of its biggest new products and 10 important developing markets, including BRIC. In order to improve upon its margins and bottom line, the company is expected to save $10 billion by 2016 under a restructuring plan which includes job cuts and other operational savings.
It seems that the restructuring initiatives have started to deliver, as the company experienced improvement in its core margins and lowered its core selling, general and administrative expenditures. Manufacturing related savings and higher prices helped the company improve its core gross profit margin. The table below shows the margins based on core results of the company.
Three Months Ended Sept 30 2011
Three Months Ended Sept 30
Selling, General and Administrative Exp as % of Sales.
Source: Earnings Release
For the second quarter of fiscal year 2013, the company is expecting organic sales growth of 1% - 3%, whereas currency is expected to have a negative impact of 2% on total sales. Core earnings for the next quarter are expected to be between $1.07 and $1.13. For the full fiscal year, the company maintained its organic sales growth guidance of 2%-4%. Currency is expected to reduce sales by 2%-3%. Expected core earnings for the year are $3.8- $4 per share.
The company offers a decent dividend yield of 3.2%. The company has been sharing its success with its shareholders through dividend payments and a share repurchase program. It seems that the company will be able to maintain its dividends going forward, given an operating cash flow yield of 7% and a free cash flow yield of 5%. In fiscal year 2013, dividends are expected to increase and share repurchases are assumed to be $4 billion, almost 2% of the current market cap.
Better than expected results for PG for the quarter will weaken the case of Bill Ackman, who purchased company shares worth $1.8 billion, equaling a 1% stake in the company. Recently, Ackman has been pushing for the removal of the company's CEO. The CEO of the company, Bob McDonald, is being blamed for the weak financial performance of the company in the last 2 to 3 years.
We believe the company has to keep on delivering performance improvements in the upcoming quarters if McDonald is to remain the CEO. PG has a strong business model. Coupled with its restructuring program, we believe the company will be able to improve upon its financial performance and margins in the future.
The stock of the company is currently trading at a forward P/E of 16x and has a PEG of 2.2. It is expected to enjoy a healthy per annum growth rate of 8% for the next five years.