Why You Should be Buying This Outperforming FMCG Giant
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Procter & Gamble Company (NYSE: PG) has significantly outperformed the S&P500 and its peer group consisting of Unilever (NYSE: UL), Church & Dwight (NYSE: CHD) and Colgate-Palmolive Company (NYSE: CL) in the last 3 months. Yet it is available at the lowest PE and has the highest dividend yield among its peer group companies.
In addition to low valuations, high dividend yield and strong stock price momentum P&G has several company specific positives which makes it a better investment that its peer large cap FMCG (Fast Moving Consumer Goods) companies. Some of these positives include a significant cost cutting plan in place, involvement of activist investor Bill Ackman to unlock shareholder value, and strong fundamentals as depicted from a better than expected earnings result.
Procter & Gamble Company posted Fiscal 1Q13 earnings of $1.06/share, an increase of 5 cents y/y (against the consensus estimate of 96 cents/share). Its operating profit increased 1%, indicating that P&G’s pricing benefits and cost savings are finally offsetting negative mix and inflation. With product innovation and productivity being the company’s focused themes of 2013, I think this stock is already set for a good start for next year. Other growth drivers which might give a boost to the share prices can be market share gains, reinvestment of free cash flows and profitability improvements.
Here are the key positive catalysts which I feel will drive share prices ahead.
Increase in Organic Sales:
Out of five, four of the business segments posted positive organic growth (excluding the impact of acquisitions, divestitures and foreign exchange) in the earnings, with an average of 2%. Organic growth was -2% in beauty, 2% in healthcare, 3% in baby/family, 3% in fabric/home and 1% in grooming. I am intrigued with a 7% escalation in pre-tax earnings from Fabric Care & Home Care, which is directly reflecting positive pricing effects and an encouraging sales mix. Sales of Tide Pods in the United States were one highlight. With cost saving efforts and upward pricing measures already in place, I expect to see this trend of growth in organic sales by 1-2% continuing in the longer term.
Cost Saving Initiative
P&G’s long-term strategies include a 5 year cost savings initiative of $10 Billion. It aims to cut down overhead expenditure and marketing costs, generating savings through efficiency. The plan targets to reduce spending together with a workforce reduction of 5,700 by the end of 2013. We were able to see an early progress of the savings program, in Q1 and I think this is the start of improving and more consistent results.
Innovation at Core
P&G’s ability to assess the needs of consumers and create a new set of brands and categories is time tested. It is making constant innovation in its top brand categories such as Pampers Baby Dry, Crest Pro-Health for Life and bringing in new range for Pantene and Head & Shoulders. On the other hand, Tide Pods seems to be a bright spot as it is all set to hit $500 million in its first-year sales and will help P&G to gain share in the US laundry market. The company is also focusing on emerging markets, where it has planned to partner with MediaCom and Yahoo! to launch "Style Factor," which aims at women in India, Indonesia and the Philippines.
With company plans to focus on its 40 top businesses in the top 10 developing markets, supported by strong marketing and an efficient distribution channel, I anticipate an upside in profits in the time to come.
P&G has a strong balance sheet with a total debt of $32.6 billion, or 33% of debt plus shareholders’ equity. Cash and equivalents are $5.3 billion and shareholders’ equity is $64.9 billion. Additionally, I like P&G’s traditionally defensive characteristics and good dividend history in an uncertain macroeconomic environment. I foresee P&G’s investors are likely to receive an attractive stream of dividends while waiting on more favorable fundamentals and positive catalysts to meaningfully increase the share price.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Procter & Gamble Company and Unilever. 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.