How Long Will Procter & Gamble Continue Without Growth?
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The recent publication of Procter & Gamble's (NYSE: PG) quarterly financial reports didn’t show growth in revenues, but at least operating profitability remained stable. Most of the drop in sales was due to shifts in currencies. When controlling for the shifts in foreign exchange, the company’s revenues remained flat during the quarter. Nonetheless, the company’s profit of $1.06 per share was higher than analysts’ expectations of $0.96 per share. This suggests the company’s stock may rally in the near future. Despite this news, could the company be able to turn it around by the end of the year and reach sustainable growth in revenues?
Procter & Gamble in the Recent Quarter (September 30)
The company didn’t see much progress during the quarter ending on September 30: the net revenues decreased by 3.7% compared to the parallel quarter of 2011, but rose by nearly 2.6% compared to the previous quarter. Operating income also declined by 7% compared to the same quarter in 2011.
According to the company’s financial reports, the drop in revenues was mostly due to the impact in foreign exchange rates mainly in countries with a pegged currency rate such as China. The shifts in foreign exchange had a 6% negative impact on the company’s revenues, while the shift in total volume was zero; the rise in prices by nearly 2% across the company’s products curbed the adverse effect of the foreign exchange. This means that if the USD will continue to strengthen against major currencies it could further adversely affect the company’s revenues. Perhaps the recent decision of the FOMC to launch QE3, in which the Fed will purchase mortgage backed securities at a $40 billion per month pace, may pull back the USD for the rest of 2012 and 2013. In such a case, it may help the company's revenues' growth.
Among the company’s five business segments grooming related products remained the most profitable at nearly 32% operating profitability (before taxes), but this segment is the smallest in terms of sales compared with the company’s other segments. Further, this segment’s sales also suffered the sharpest drop, compared to other segments, during the quarter with a 7% decline compared to the parallel quarter in 2011; the beauty segment also declined by 7% during the quarter.
On the other hand, the revenues of the largest business segment, in terms of revenues, Fabric Care and Home Care segment’s sales, fell by 2% year-over-year. Despite the lack in revenue growth, Procter & Gamble continues with its austerity plan: The Company is on track to cut 4,200 jobs by the end of the month and a total of 5,700 for the 2012 fiscal year. The cuts are most likely the main factor for the company’s sustained operating profitability (see below). This analysis shows that the company’s core businesses continue to struggle but maintained operating profitability due to cost cuts rather than a rise in sales.
Procter & Gamble and the Competitors
The changes in foreign exchange and the economic slowdown may be among the factors to halt the company’s revenue growth however, in terms of operating profitability the company has done well; in this regards, P&G is in the middle of the pack compared to other related companies: during 2011 and 2012, the operating profitability of Colgate-Palmolive Company (NYSE: CL) ranges between the 22% and 24% range, which is higher than the operating profitability of P&G. On the other hand, the operating profitability of Kimberly-Clark Corporation (NYSE: KMB) is slightly lower than P&G’s. Nonetheless, the operating profitability of Procter & Gamble in the third quarter is higher than the previous quarter and only slightly lower than the same quarter in 2011.
Procter & Gamble and the Market
During the month the company’s stock declined by nearly 1.8%; the S&P500 declined by 2.2%. Further the linear correlation between the changes in the S&P500 index and the company's stock was 0.72 during September and October. This means, under certain assumptions, nearly 53% of the company’s volatility could be attributed to the changes in the S&P500 index. Despite the strong correlation, the shares of the company have under-performed the S&P500 index: P&G rose by 3.6%, year-to-end; the S&P500 index increased by 10.3%. The shift in market sentiment curbed the rally of the S&P500 in recent days. If the current bearish market sentiment will continue it could also impede the progress of the company’s stock in the weeks to follow. The chart below presents the normalized prices, as of the beginning of January 2012, of the S&P500 index and P&G stock.
I suspect most of the stock's rally in the previous months was due to the backwind it received from the rise in the financial markets (S&P500 and other stock indexes). The company continues to show little growth in sales and part of the sustained profit margin of the company was due to P&G's cuts in certain business segments. If the company won’t be able to turn it around and present revenue growth, it could eventually pull the stock back. For the near future, however, further progress on the company's austerity plan and perhaps a weaker dollar may keep the company’s profit margin at its current level.
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