Procter & Gamble - Despite Incremental Improvements, Shares Already Trade At A Full Price

| About: The Procter (PG)
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Shares of Procter & Gamble (PG) rallied 3% in today's session after the consumer packaged goods provider announced a decent fourth quarter earnings report.

Fourth Quarter Results

Procter & Gamble reported fourth quarter revenues of $20.2 billion, down 1% on the year, and slightly below analysts' forecasts of $20.25 billion. Revenues were impacted by adverse currency headwind of 4% as the U.S. dollar strengthened notably in recent months. A 3% increase in organic sales came in at the high end of expectations, but was not enough to generate absolute revenue growth. Volumes were stable compared to last year, while prices increased by 4% on average across product ranges and geographical regions.

Diluted operational earnings per share came in at $0.74 per share. Excluding restructuring charges of $0.08 per share, core earnings came in at $0.82, unchanged from last year. Core earnings came in ahead of analysts' expectations of $0.77 per share, as the company has started cutting costs already. Diluted net earnings per share came in at $1.24, or $3.63 billion, as a result of a $0.48 per share gain related to the sale of the company's snack business.

"We enter fiscal 2013 with very strong developing market momentum, strengthened plans on our core developed market business, and with the benefit of a $10 billion cost savings program, which is well underway," said CEO and Chairman Bob McDonald, commenting on the results.


The company guides for 0-5% growth in core EPS for its full fiscal 2013. As such, the guidance translates to core earnings per share of $3.80-$4.00 per diluted share. Earnings per share growth will be driven by organic sales growth of 3-4% and cost savings, partially offset by the effects of a strong dollar, pension contributions and rising commodity prices. The company estimates non-core restructuring charges at $0.15-$0.19 per share for the full year of 2013, resulting in net earnings per diluted share of $3.61-$3.85

The company hopes to return $10 billion to its shareholders in the coming fiscal year. Roughly $6 billion will be paid out in dividends, with the remainder coming from share buybacks.


Procter & Gamble ended its fiscal 2012 with $4.4 billion in cash and equivalents. The company operates with roughly $29.4 billion in short and long term debt, for a net debt position of around $25.0 billion. For its fiscal year 2012, the company reported $83.7 billion in net sales, on which it net earned $9.3 billion from continuing operations, or $3.24 per share. Earnings are down 20% compared to fiscal year 2011.

Based on Friday's closing price of around $65.50, the business is valued around $180 billion, or roughly 2.1 times annual revenues and 19 times its annualized earnings from continuing operations. This valuation compares to a revenue multiple of 3.0 times for Colgate-Palmolive (CL) and 2.9 times for Church & Dwight (CHD). Both competitors trade at 21 and 26 times earnings, respectively.

Currently, Procter & Gamble pays a quarterly dividend of $0.56 per share, for a fat annual dividend yield of 3.4%.

Investment Thesis

Shares of Procter & Gamble have seen disappointing returns so far in 2012, with shares trading down 2%. Shares have returned a mere 4% over the last five years as the company has struggled to generate meaningful revenue and profit growth. On the positive side, shareholders have received a nice dividend yield over those years, while the company repurchased approximately 15% of its shares outstanding.

With dismal operating performance being reflected in the share price, CEO Bob McDonald has come under pressure as he has been at the company's helm for four years now. More worrisome, some people are saying that morale at the company is very low, limiting the urgency and desire for change. Investors react favorably to the organic revenue growth rates of today, hoping to identify signs of accelerating growth in sales and profitability. Unfortunately, all growth was driven by increases in pricing, with volumes being flat compared to last year.

McDonald is clearly feeling the heat, as prominent hedge fund manager and activist investors Bill Ackman has urged the company to change its leadership structure. In response, McDonald has said he aims to save $10 billion through 2016 by cutting 10% of the company's staff, especially in the marketing department. However cutting back on marketing is a tenuous approach with organic sales growth running very low already.

Despite the expectation of positive changes in the short to medium term, I think Procter & Gamble already trades at a "full" valuation, even when incorporating some of the expected improvements.

While I might buy the company's products for daily use, I'll go shopping elsewhere with regard to my financial investments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.