Procter & Gamble: Corrective Measures, Positive Expected Performance Ensure A Buy

Procter & Gamble (NYSE:PG) is among the world's leading retail goods companies and has a diverse geographical revenue base. The company seems to be on track to deliver a healthy financial performance since the induction of new CEO, Mr. Lafley. PG has significant emerging market exposure; almost 40% of the company's sales are generated from emerging markets, which remains an important long-term earnings growth driver for the company. Also, the company's new product initiatives and cost reduction efforts are likely to fuel the company's sales and earnings growth. Moreover, the company offers a solid dividend yield of 3% and has an aggressive share repurchase program, which is likely to boost EPS in the future. Therefore, I recommend a 'buy' rating for the stock.

Financial Performance Q1 FY2014
Last week, the company reported healthy financial results for Q1 FY2014, which marks a solid start to fiscal year 2014. The company reported an EPS of $1.04 for the quarter, up from $0.96 in the corresponding period last year. The adjusted EPS came out to be $1.05, in line with analyst estimates. The company also experienced a sales growth of 2.2%, resulting in quarterly sales of $21.2 billion, beating analyst expectations of $21.1 billion. As the company has significant international market exposure, foreign currency movements shaved away 2% of total sales for the quarter. Results for the quarter were positively affected by the increased sales of baby products and home-care goods.

Sales of the company's largest segment, Fabric and Home Care unit, which comprised approximately one-third of PG's sales last year, experienced an organic sales increase of 6% year-on-year, beating consensus estimates of 3%. PG's Baby, Feminine and Family Care segment also experienced an organic sales growth of 6% year-on-year, better than consensus estimates of 5%. The fundamentals for both the abovementioned segments remain strong, as the organic growths of each segment were led by volume growths rather than price increases or acquisitions.

A negative takeaway from the recent quarter's earnings release was that PG's gross margin fell approximately 130bps year-on-year, mainly due to foreign currency pressures and higher commodity costs. The company stays focused on improving its gross margin, and I believe the company will come up with a plan in early 2014 to sustain and improve its gross margin. I view PG as a best-in-class company, and expect consistent gross margin expansion in the long term.

PG reiterated its FY2014 guidance in the recent earnings release. The company continues to expect FY2014 organic sales growth of 3%-4% and core EPS growth of 5%-7%. Due to large international market exposure, PG anticipates foreign currency movements to have an adverse impact of 2% on top line result for FY2014. Analysts have forecasted an EPS of $4.28 for FY2014 and an attractive next five years growth rate of 8.50%.

Stock Price Catalysts
In order to create shareholder value, the company has been working on product innovation and cost savings. The company remains committed to coming up with new products to tap available growth opportunities and target different market segments, which will have a positive impact on PG's market share. Also, the company is aggressively working on its cost control efforts, which is likely to result in cost savings of up to $10 billion by 2016. PG is on track to delivering $1.4 billion of savings in FY2014, which is equal to almost 11% of PG's FY2013 operating profit. The company also indicated that it has been working on the next round of cost saving initiatives, which will have a positive impact on the stock price. PG's cost saving efforts will free up more resources/funds, which can be used for research and marketing.

Approximately, 40% of the company's total revenues are earned from emerging markets, which provide attractive growth opportunities. Attractive growth opportunities in emerging markets are offsetting a slowdown in developed markets. In the recent quarter, PG experienced an 8% organic sales growth in emerging markets, in contrast to a 2% organic sales growth in developed markets. As we move forward, I believe the proportion of PG's emerging market sales will increase, which will fuel earnings growth for the future.

Also, the company's rich shareholder-friendly policies remain an important stock price driver for PG. The company has been aggressively undertaking share repurchases, which I believe will boost the company's EPS and magnify its ROE. In the ongoing FY2014, PG anticipates to spend $11.5-$13.5 billion worth of share repurchases and dividend payments. Currently, PG offers a strong dividend yield of 3%, backed by its solid free cash flows. The following table shows a healthy comparison between annual dividend payments and free cash flows.

Source: Company Reports

Conclusion
The company took a solid start to FY2014 and I expect it to deliver a healthy financial performance in the future. PG has been undertaking corrective measures to strengthen its financial performance and market share. Product innovation, productivity improvement efforts and significant emerging market exposure are likely to drive future earnings for PG. I believe the company will announce its plan regarding the next round of productivity savings in early 2014, which will have a positive impact on the stock price. Therefore, I believe the stock remains a good long term investment opportunity for investors.

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.