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Procter & Gamble’s Initiatives Hold Promise, Sales Weak


We issued an updated research report on The Procter & Gamble Company PG on Oct 13. This consumer goods giant, with a market cap of around $236.35 billion, has seen its shares rise roughly 12.2% so far this year as against a 6% increase for the S&P 500 over the same period.

Portfolio Initiatives

Procter & Gamble’s products enjoy strong brand recognition and are sold in more than 180 countries. The company enjoys leading positions in over 75% of the categories in which it competes. Its 21 Billion Dollar Brands, that generate $1 billion to over $10 billion in sales annually, are some of the world’s most commonly known household names. These products have reached the Billion Dollar Brand status through sustained product innovation and geographic expansion.

The company is also focused on streamlining its business which concerns the Billion Dollar Brands like Tide, Pampers and Oral-B. As part of these portfolio strengthening and simplification plans announced in Aug 2014, the company completed the shift of “P&G Specialty Beauty Brands” under Coty Inc. COTY on Sep 30.

The $11.4 billion deal, which was announced on Jul 9, 2015, is a stock swap between the companies in which Procter & Gamble’s investors were allowed to choose to tender all or part of their shares into the new company, named Galleria Co. Effective Oct 1, 2016, Galleria merged with an affiliate of Coty and became a wholly owned subsidiary of Coty. Under this, Galleria’s common stock was converted into the common stock of Coty.

Following the spin-off, Procter & Gamble has a portfolio of about 65 consumer and shopper-preferred leading brands focused on 10 categories under four industry-based sectors. Traditionally, these brands have grown faster and have proved more profitable than the others.

We believe that a smaller and more focused company should be able to grow faster, create more value and be much easier to manage. This positions the company for stronger sales and earnings growth. The company’s long-term goals include growing organic sales modestly above market growth, achieving core earnings growth in mid-to-high single digits and generating free cash flow productivity (ratio of free cash flow to net earnings) of over 90%.

Sales a Drag?

However, Procter & Gamble has been struggling to boost sales over the past several quarters. Weak sales have been overshadowing margin improvement from pricing gains and cost cuts. Significant Fx headwinds, weak volumes and slowing market growth – primarily in the emerging markets – have been denting sales. Brand divestures and management’s portfolio reshaping measures are also hurting sales.

Procter & Gamble operates in a challenging and volatile macro environment. Market growth rates are constantly decelerating, primarily due to slow growth in developing markets, which is marring sales. Global market growth in Procter & Gamble’s categories has decelerated from 4% a year ago to 3% at present, mainly due to slowdown in emerging markets.

Zacks Rank & Key Picks

Procter & Gamble currently has a Zacks Rank #4 (Sell). Better-ranked consumer staples stocks are Colgate-Palmolive Co. CL and Dr Pepper Snapple Group, Inc. DPS.

Colgate-Palmolive has recorded an average positive earnings surprise of 0.71% over the past four quarters, with a beat in each. The company sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dr Pepper holds a Zacks Rank #2 and its full-year 2016 earnings growth is projected at 8.7%.

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