Procter & Gamble (NYSE:PG) has seen its operating margin tumble.
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Going into this year, Procter's 5-Year-Average operating margin was a robust 20, the envy of the consumer staples space. In fact, Procter has managed impressive margins going back a decade, averaging 19. Procter's recent 16 operating margin TTM has been devastating, savaging its bottom line. While revenues are climbing, profits are declining. Last quarter, Procter's operating margin dropped to 15.2.
Procter has underperformed its sector as profits became lackluster.
Low Margins Are Unlikely To Persist
Procter is in cutting mode—reducing head count and overtime. Per the conference call:
We now think we will achieve the majority of our initial 10% reduction target by the end of the calendar year, which represents meaningful acceleration.
Procter's CFO Jon Moeller spoke on the benefits of restructuring, especially in a "normalized" world:
$2 billion in savings per year, regardless of whether they come from cost cuts or operating leverage, create an 11 points earnings per share benefit. If we only bring half of the bottom line it would equate to about six point earnings per share benefit. This 6 to 11 point range of savings benefit would take the 4% earnings per share growth to a range of 10% to 15%. Share repurchase should add another two points, taking earnings per share growth potential to a range of 12% to 17%.
Procter's low operating margin gives investors a decent entry point. Management is committed to raising operating margin. Consider the effect of increasing its margin toward historical averages. Imagine last quarter's earnings with different margins:
Translating into quite different earnings:
Procter's weak margins are unlikely to persist. If the company is successful at increasing its margins back to historical levels, shares will outperform.
Disclosure: I am long PG.
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