Will Procter & Gamble Continue to Rise in 2012?
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The recent recovery of Procter & Gamble (NYSE: PG) raises the question will this rally continue throughout the rest of the year. Has the company turned it around so that we should expect this recovery to continue? Following the hype of the entrance of Bill Ackman to the company, it’s time to examine the recent developments in the company that could explain its rally and whether it will continue in the months to follow.
Procter & Gamble in the Recent Quarter 2012 (June 30th, 2012)
The company didn’t show much signs of recovery during the quarter: the net revenues declined by 1% compared to the parallel quarter of 2011. The operating income also declined by 4%.
The company has made changes that include: cutting jobs – there are reports that the company is expected to reduce nearly 5% of non-manufacturing jobs – selling assets – the company sold its shares in Pringles – and a drop in research and development – the company’s number of innovations have declined in recent years which puts a damp on the company’s poetical growth to explore new products.
Among the company’s five business segments grooming related products is the most profitable at nearly 27% net profitability (before taxes), but this segment is the smallest in terms of revenues compared with the company’s other segments and, much like all other segments, it hasn’t risen in terms of volume during the quarter. This means there is little signs of growth even of the company’s top segment (in terms of profitability).
Procter & Gamble and the Market
The company's stock has made a comeback in recent months, and during the year the stock has increased by 3.6% year-to-end. In comparison, the S&P500 index also didn't perform well during 2012 but increased by 11.9%. This means that up to now the company has under-performed the market.
As seen below, Procter & Gamble stock's has risen in recent months but under-performed the S&P500 index during year (In the chart are the normalized prices of Procter & Gamble and S&P500 as of the beginning of January 2012).
Procter & Gamble and the Competitors
In comparison to its peers and competitors Procter & Gamble hasn’t done much better in terms of operating profitability and dividendS it offers to its investors: on a yearly scale the Kimberly-Clark Corporation (NYSE: KMB) offers $2.96 per share dividend which is nearly 3.6% dividend yield; Johnson & Johnson (NYSE: JNJ) offers $2.22 per share dividend which is also nearly 3.6% dividend yield; Eli Lilly & Co. (NYSE: LLY) offers $1.96 per share dividend which is nearly 4.6% dividend yield. On the other hand, P&G offers only $2.25 per share which comes to nearly 3.3% dividend yield.
In terms of operating profitability, P&G is in the middle of pack with around 15-16% operating profitability compared with J&J’s operating profitability of around 25-28% in 2012 and Eli Lilly’s operating profitability of around 21-24%; Kimberly-Clark’s operating profitability was the lowest among these companies at around 13-14% in 2012.
This means the P&G hasn’t done much better than many of its competitors and so it comes down to other potential advantages the company might have over other similar customer product companies such as the level of risk the company has and its potential growth.
In regards to risks the company is facing many risks that many international companies face including currencies risks, legal issues, changes in market, economies slowdown etc.
In regards to currency risk during the fourth quarter (ending on June 30th, 2012) the company’s earnings have declined by 4% due to changes in foreign exchange.
The Foolish Bottom Line:
Despite the recent recovery of the company, there are some changes it could do and is doing in order to cut cost but in regards to its growth, it is much harder to see how the company will manage to turn in around. As long as the slow to little growth in Europe and U.S will continue, it’s likely to keep the competition high and profit margins low. It’s also hard to see how the company could turn in around as its R&D isn't expanding which puts the company's growth in jeopardy.
For further Reading see: Is Chesapeake walking towards the right path?
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.
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