On Sep 15, we issued an updated research report on The Procter & Gamble Company (PG).
P&G enjoys strong fundamentals including solid brand recognition, diversified portfolio, aggressive cost-savings program, rapid growth in developing nations, impressive product development capabilities and marketing prowess.
The consumer goods giant reported mixed fiscal third-quarter 2014 results, beating the Zacks Consensus Estimate for earnings but missing the same for sales.
Adjusted earnings of 95 cents per share grew 20% year over year driven by pricing gains, cost reductions and lower taxes. Organic revenues were up 2%, primarily due to pricing as volumes were flat. While the Beauty and Fabric Care/Home Care segments slowed down from the last quarter, the Grooming business picked up. The HealthCare segment, however, remained weak.
The major announcement during the earnings call was the company’s plan to divest around 100 non-core brands over the next two years.
CEO Lafley plans to streamline the company’s business to focus more on 70 to 80 of its biggest brands including the Billion Dollar brands like Tide, Pampers and Oral-B. Though the company did not specify the brands it plans to keep or divest, it stated that these consumer and shopper preferred leading brands have accounted for 90% of the company’s sales and over 95% of its profits. These core brands have grown approximately 100 basis points (bps) faster than the total company, at more than 100 bps higher pre-tax margin.
Over the next two years, P&G will harvest, partner, divest or discontinue 90 to 100 brands whose sales and profits have been declining for the past three years. We believe that a smaller and more focused company should be able to grow faster, create more value and be much easier to manage.
However, the plan’s execution risk is high given the number of brands involved. Decelerating levels of market growth in both developed and developing regions and intense competitive spending in several categories also pose as headwinds to growth in future quarters.
Other Stocks to Consider
P&G carries a Zacks Rank #3 (Hold). Better-ranked consumer staples are Reckitt Benckiser Group plc (RBGLY), The Newell Rubbermaid Inc. (NWL) and PepsiCo, Inc. (PEP). All the three stocks carry a Zacks Rank #2 (Buy).
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