Will the Arrival of Ackman Help Procter & Gamble?
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There is a lot of debate over the recent changes in Procter & Gamble Co. (NYSE: PG). Most of this surrounds the entrance of Bill Ackman to the mix after he had purchased via his investment firm, Pershing Square Capital Management, $2 billion worth of PG's stocks that reflect nearly 1% of the company's value. There are already reports that the next move of Ackman will be to pressure the CEO, Robert McDonald, to change his policy. Is there something this investor could do to change the path the company is headed? Let's examine this issue in more detail.
The company's stock has shifted from gains to losses during the year but eventually edged down on a yearly scale by 1.4% (UTD). As a comparison, the S&P500 index also didn't perform well during 2012 but rose by 4.5%. This means that at least in the short term the company has under-performed the market.
The chart below shows the developments of Procter & Gamble stock's price and the S&P500 index during 2012.
But this modest performance is also reflected the company's financial results compared to its competitors. During the past year the operating profitability of the company was lower than Johnson & Johnson (NYSE: JNJ) but a bit higher than Kimberly-Clark Corporation (NYSE: KMB). The chart below shows the development in the operating profits of all three companies during the past four quarters.
The company tried to expand its operations outside of Europe and the U.S and cut jobs in order to deal with the slowdown in the company's progress. This line was led by the company's CEO Robert McDonald. But this line doesn’t seem to impress many investors as the company's stock continued to dwindle.
So the company isn't doing well and the direction of P&G might not be the direction that many investors agree with.
The arrival of Ackman might change this. But before we will consider this move I think it's important to point out that this company much like its competitors isn't growing by a sharp margin as it once did. The economic slowdown in Europe and the U.S. in recent years has adversely affected consumer products. The ongoing decline in consumer confidence in the U.S. doesn't project well for the progress of the company.
Besides the macroeconomic perspective there is the matter of the market structure: with so many competitors, the market is in a state of perfect competition with little added value for branding especially when the big competitors also have respective quality brand names. This means there isn't hedonic pricing or little of it in these markets.
Therefore if people consider the price of the consumer product as the main factor to purchase, then Procter & Gamble is in trouble because its factories are located in the U.S. (mainly in Cincinnati); the company uses American workers and American salaries which puts the company at a disadvantage against other companies that relocated their facilities to lower salaried countries and competition from abroad.
After all, the products of P&G are not an iPhone or iPad in a sense that it's not hard to replace them for products that are produced by other companies that might be inferior to P&G. The competition coming from countries such as China makes it hard for companies such as P&G to show high profits.
Ackman has his work cut out for him. I'm not sure he will be able to turn this company around because it's much harder to change a company that is in a highly competitive market, with no or little pricing power.
The Foolish bottom line:
I guess there isn't much the company can do to change its circumstances. The company might change its direction in the years to follow and make some more jobs cuts and keep the company's facilities in the U.S. The company could emphasize again its efforts in the U.S. and Europe, but since these economies aren't growing as they once did, it won't necessarily be a good move.
This is by no means an investment advice. Use caution when investing in stocks.
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liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson, Kimberly-Clark, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.