On Sep 20, we maintained a Neutral recommendation on The Procter & Gamble Company (PG), despite improved first-quarter fiscal 2013 results. Though the company’s new strategic plan looks encouraging, we prefer to wait until we see substantial benefits from it.
Why the Neutral Recommendation?
After a slow third quarter, P&G reported decent fourth-quarter fiscal 2013 results beating the Zacks Consensus Estimate for both earnings and revenues. P&G’s fourth-quarter fiscal 2013 adjusted earnings of 79 cents per share surpassed the Zacks Consensus Estimate of 77 cents by 2.6%. Earnings beat management’s guidance range of 69 cents–77 cents but declined 4% from the prior-year level. Encouragingly however, earnings declined less than management’s expectation of a 6%–16% shortfall. Solid volume gains, strong cost savings, lower-than-expected taxes and reduced share count (due to significant buybacks) made up for the unfavorable mix, currency headwinds and higher marketing spend in the quarter.
Sales increased 2% to $20.7 billion as robust innovation and accelerated marketing boosted volumes in the quarter. Sales also slivered past the Zacks Consensus Estimate of $20.59 billion.
P&G undoubtedly commands solid long-term fundamentals with strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess.
In order to improve the company’s operating performance, new Chief Operating Officer (CEO), A.G. Lafley, unveiled a strategy which focuses on value creation for shareholders through sales growth, gross and operating margin expansion and strong cash flow productivity. In order to achieve this, the company laid out four functions. Firstly, the company will invest selectively in core businesses, which include the most profitable categories, brands, markets, channels and customers. The other three functions include, making strategic, focused investments in innovation and go-to-market capabilities, accelerating cost savings and productivity improvements and improving operating discipline.
Though the plan sounds encouraging, we prefer to wait until it drives substantial organic revenue growth. Moreover, though some signs of modest economic recovery and improving consumer confidence can be seen in the U.S., there is still great uncertainty. The U.S. consumers are burdened with higher gasoline prices, payroll tax increases and delayed tax refund checks. These external forces might restrict consumers’ discretionary spending in addition to slow job growth, high interest rates and tightened credit availability. Moreover, P&G is facing volatile market dynamics in countries like Venezuela and Argentina. The persistently sluggish European economic conditions also create an overhang.
P&G carries a Zacks Rank #3 (Hold). Other consumer staples stocks that are worth considering include Pinnacle Foods Inc. (PF), Green Mountain Coffee Roasters, Inc (GMCR) and Dole Food Company Inc. (DOLE). While PF carries a Zacks Rank #1 (Strong Buy), DOLE and GMCR carry a Zacks Rank #2 (Buy).
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