On Mar 4, we issued an updated research report on The Procter & Gamble Company PG.
P&G reported second-quarter fiscal 2015 results on Jan 27 wherein it missed the Zacks Consensus Estimate for both earnings and sales — for the second quarter in a row. Earnings of $1.06 per share declined 8% due to currency headwinds.
Organic revenues went up 2%, as better pricing made up for softer volumes. Moreover, the maker of Tide detergent and Pampers diaper lowered the full-year expectations to reflect negative currency impact on sales and profits.
The consumer goods giant 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.
Further, P&G’s strategy of divesting around 100 underperforming brands to concentrate better on a few core strategic brands sounds encouraging. We believe that a smaller and more focused company would be able to grow faster, create more value and be much easier to manage.
In keeping with this plan, last year, P&G sold off its American and Asian pet care business to Mars, Inc. in July and the European pet care business to Spectrum Brands Holdings, Inc. SPB in December. Moreover, the company has signed a deal to divest its Duracell batteries business to Berkshire Hathaway, Inc. BRK.B in exchange for Berkshire’s equity stake in P&G. In November, last year, the company signed a deal to divest Camay and Zest soap brands to the U.K.-based consumer goods giant Unilever, plc UL. Both the Unilever and Duracell deals are expected to be closed in fiscal 2015.
However, these structural changes and other initiatives to improve organic growth are yet to translate into top-line improvement.
P&G is operating in a challenging environment. Slowing global market growth, strong currency headwinds, unrest in several markets in the Middle East, Russia and Ukraine, and pricing controls/import restrictions in Argentina and Venezuela have made it difficult for the company to grow its revenues. These headwinds are expected to continue in the future quarters as well.
Moreover, management expects market share erosion and lower consumption in several countries due to pricing action taken to offset currency impacts. With around 60% of the company’s business generated outside North America, currency headwinds affected sales by 5% in the second quarter as a strong dollar lowered the value of virtually every currency in the world, mainly the Russian ruble. In the second quarter, P&G took Fx-related pricing action in countries like Ukraine, Mexico, Argentina, Brazil and Venezuela.
The company delivered 2% organic sales growth in the first half of the year. However, management expects organic top-line trends to accelerate moderately in the second half given an improving U.S. market, easing comparisons and higher pricing to offset Fx impacts. Moreover, lower commodity costs and productivity savings in the second half should result in meaningful improvement in core earnings per share compared with the first half.
However, significant negative Fx impact, market share erosion due to pricing action and macroeconomic headwinds in a number of key markets remain the challenges in the second half.
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