Procter & Gamble Earnings Preview: Slow And Steady Wins The Race

| About: The Procter (PG)

Procter & Gamble (NYSE:PG), the iconic consumer-staples brand household brand giant, reports their fiscal q1, 2014 before the bell on Friday, October 25th, 2013.

Analyst consensus is expecting $1.05 in earnings per share (EPS) (vs. $1.06 in last year's q1 '13) on $21.05 billion in revenue, for expected flat EPS growth on 2% revenue growth.

PG hasn't grown revenue organically, in the mid-single-digit (MSD) range, since 2008, just prior to the Financial Crisis. Since late 2008, PG has averaged 0% revenue growth and 3% organic revenue growth, as measured from Sept. 2008, through June, 2013.

The problem, which has been well known for some time has been PG's premium pricing in a world of private-label brands, and a consumer that has traded down both in the U.S., and abroad.

Consumer staples as a group have underperformed in 2013, which is understandable given the defensive nature of the sector: Staples typically have low-single-digit revenue growth and mid to high single digit EPS growth is all economic environments, and tend to be valued higher (or see PE expansion) when economic uncertainty is high and portfolio managers put a premium on earnings stability.

I thought Bill Ackman acquired his stake in PG in the spring of 2012, but since then, Bob McDonald (the former CEO) has been replaced by another former CEO AG Lafley, and PG continues to take small steps to re-position some of the segments and take some expenses out of the income statement.

Being a consumer marketing and branding giant, PG has to move slowly on the brand front. For most CEOs, the easiest and quickest way to generate earnings growth is to slash expenses, particularly payroll, but the problem at PG is more end-user price sensitivity and brand positioning, as well as demand at the high end, which takes more time, and at least in my opinion is more of an intricate process.

I wouldn't consider PG a turnaround in the traditional business sense of that term but there is no question PG has required a re-positioning and possibly a re-branding and some encouragement to enter the value end of the market, which might mean sacrificing some margin for some volume growth.

PG has a rock-solid balance sheet and generates a lot of free-cash-flow: the average free-cash-flow generated over the last 5 years (20 quarters) has been $2.7 billion per quarter. The 5% free-cash-flow yield is pretty standard relative to other staples.

The dividend yield is roughly 3% currently and combined with PG's share repurchase plan, the company is spending 100% of their free-cash on the dividend and the share repo program.

PG's valuation isn't really cheap, but it never trades that way: at 16(x) cash-flow and 18(x) and 17(x) expected fiscal 2014 and 2015 EPS estimates of $4.28 and $4.65 on expected earnings growth of 6% and 9%, the stock is pretty fairly-valued.

The stock is up 22% over the last 12 months and roughly 19% year-to-date (excluding the dividend) so PG may turn out to be one of Bill Ackman's better positions.

We've been picking away at the stock since November, 2012, but on a stock like PG, you can be patient, and we recently added to the name in late September, early October 2013.

Ultimately, we think PG can earn $5 per share and with a 20(x) multiple, that would take the stock to $100 share price, but I think we would need to see better consumer confidence and growth, and the willingness for the consumer to trade up again and pay a premium price. Expense cuts could get the brand giant to that multiple, but I don't think PG likes to be that dramatic.

Eventually organic revenue growth will return to consistent mid-single-digits, and PG will likely do it with sacrificing margins too much, and EPS growth will get back to high-single-digits or even low-double-digits, but given PG's culture, PG will get there slowly and without drama.

PG's history of Revenue and EPS Growth

EPS

Growth

Revenue

Growth

2016 (est) 9% 4%
2015 (est) 9% 4%
2014 (est) 6% 2%
2013 4% 1%
2012 -2% 1%
2011 -4% 5%
2010 -4% 0%
2009 21% -5%
2008 16% 9%
2007 15% 12%
2006 4% 20%
2005 9% 10%
2004 14% 19%
2003 13% 8%
2002 11% 2%
2001 11% -2%
2000 3% 5%
1999 11% 3%

* Source - internal spreadsheet

As readers can quickly see, after the Financial Crisis, PG's revenue and EPS growth slowed markedly.

Certainly we think PG is capable of growing faster than they are today, and the last few years, and management is working to get the brand giant back to cruising speed.

Here are some earlier articles where we've talked about PG like in early September '13 (here) and then earnings previews, here and here.

Disclosure: I am long PG. 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.

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