Upside for This Conglomerate

By Piyush Arora - September 28, 2012 | Tickers: JNJ, KMB, PG | 0 Comments

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The beauty of huge conglomerates is that they have well diversified operation, which generates different sources of revenue streams. The risks posed by a couple of business segments don’t have a major impact on the company’s overall performance, and it is due to this reason Procter and Gamble (NYSE: PG) has been able to stand the test of time for the past 175 years.

Procter and Gamble is a consumer goods company based in the US. The company has more than 300 global brands in its possession, and 26 of them generate more than $1 billion in annual sales. The company has its presence in more than 180 countries, and with a market cap in excess of $190 billion, it’s easily one of the biggest companies in the world. Procter and Gamble is famous as one of the most robust blue chip companies in the market, with healthy dividend increases in the past 56 years.

Analyzing the growth prospects of this hugely diversified conglomerate, for this article would be out of scope. Suffice to say that the company has still has a huge growth potential as it’s only able to generate around 32% of its revenues from the emerging nations including India and China. Operations in India have experienced a 27% compounded annual growth in sales for the past 10 years, along with China’s 17% and Brazil’s 25%. The consumer markets in the top two populations of the world are maturing very quickly and this could be a huge driver of growth for the company.

The company recently announced its quarterly results wherein the earnings saw an upside of 45% despite a 1.2% slip in the topline. The margins of the company slipped and to beat the inflationary pressures, the management announced a cost cutting plan which is expected to save the company around $10 billion over the period 2012-2016. The number comes out to be $2 billion a year, which on the books of the company would reflect as added gross profit and reduced operational expenses.

To firm repurchased $4 billion worth of shares in the last fiscal and to add to the delight for its investors, the company announced another $4 billion buyback program to be carried out by the end of the current fiscal year of 2013. When the company is performing well, share buyback always interests me, as it highlights the amount of faith the board has in the company’s future.

Procter and Gamble shares its market space with Kimberly-Clark (NYSE: KMB) and Johnson and Johnson (NYSE: JNJ).

The financial metrics suggest that Procter and Gamble has the second best net profit margins and debt/equity levels amongst its peers. Analysts though expect that the EPS of the company to grow at the fastest pace over the next five years. Procter and Gamble has also been outperforming its peers in terms of returns on the stock price for the past 5 years.

Most of the company’s business segments are mature as none of them showed signs of rapid growth. Despite the fall in sales the company was able to increase its earnings, which was due to the increased profit margins. The company now needs to focus on its topline, as judging from the 45% increase in earnings, its operations are performing exceedingly well. The company yields a healthy 3.22% which makes the stock all the more attractive. The management of the company expects the emerging markets to be the driver of growth for the company, and it is due to all these reasons that I am compelled to give the stock a Foolish buy rating.

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