Procter & Gamble Earnings Disappoint - Is This an Opportunity?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Procter & Gamble (NYSE: PG), the world’s largest consumer-goods company, revealed their results last week and reduced earnings expectations for the full year.  Quarterly profit was down nearly 50% on a write-down for previous acquisitions and higher commodity costs. 

The company reduced their yearly earnings, forecasting a range of $4 to $4.10, down from their previous call of $4.15 to $4.33.  The company cited unfavorable currency exchange rates as the primary motivator for the altered forecast.  This echoes the sentiment of competitors Kimberly Clark (NYSE: KMB) and Colgate-Palmolive (NYSE: CL) who issued similarly downbeat expectations based on the strength of the US dollar.

P&G expects core sales, which ignore the impact of currency, acquisitions, and divestures, to rise 4% to 5% for the year.  Without the impact of write downs, the company’s earnings were $1.10, down a much more palatable 3% from last year.  The impairment charge totaled $1.5 billion dollars, or a non-cash charge of $0.50 per share. In 2005, P&G spent $57 billion to acquire Gillette after a $7 billion acquisition of Wella hair-care in 2003.  Goodwill from these previous acquisitions was written down due to exposure to Western Europe and earnings forecasts for the product lines involved.

On the upside, P&G also expects developing markets to drive future growth and operating profit growth to accelerate in the second half of the fiscal year.

With the downbeat expectations, and recent downward momentum on the stock, is P&G an attractive buy? And on a related note, are the other major players in the sector presenting an opportunity? As mentioned earlier, competitors Kimberly Clark and Colgate-Palmolive have both offered similar expectations, so I took a look at all three. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>P/E Ratio</p> <p>(TTM)</p> </td> <td> <p>Dividend Yield</p> <p>(%)</p> </td> <td> <p>Expected Earnings Growth Rate</p> </td> <td> <p>PEG Ratio</p> </td> </tr> <tr> <td> <p>Procter & Gamble</p> </td> <td> <p>18.91</p> </td> <td> <p>3.27%</p> </td> <td> <p>10.17%</p> </td> <td> <p>1.85</p> </td> </tr> <tr> <td> <p>Kimberly Clark</p> </td> <td> <p>17.81</p> </td> <td> <p>3.94%</p> </td> <td> <p>28.82%</p> </td> <td> <p>0.61</p> </td> </tr> <tr> <td> <p>Colgate-Palmolive</p> </td> <td> <p>18.29</p> </td> <td> <p>2.57%</p> </td> <td> <p>10.93%</p> </td> <td> <p>1.67</p> </td> </tr> </tbody> </table>

It appears that P&G offers the least value among the three competitors based on their PEG ratios.  Kimberly Clark appears to be significantly undervalued relative to its competitors, with a PEG of 0.61.  It also offers the most compelling dividend.  While I consider P&G and Colgate strong defensive plays, it appears Kimberly Clark is the best option among the three.  I expect all three to hold up well if we enter a global recession and to provide a stable dividend regardless of economic outlook, but KMB appears to offer additional upside.

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