Old CEO, New Prospects

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

There have been numerous successful turnarounds for companies after their old CEO’s have been hired back. But for every successful company like Apple, there have been companies like Dell where the comebacks couldn't bring about success.

Cincinnati-based Procter & Gamble (NYSE: PG) is an addition to this list of companies as ex-CEO Bob McDonald -- who struggled to turn around the world's largest consumer-products maker -- has been replaced by the company's old CEO A.G. Lafley. Will this move turn around a company that has been under-earning and has lower sales growth worse than its peers, such as Colgate-Palmolive (NYSE: CL), Unilever and L'Oreal?

Ackman pressure and earnings report

The now ex-CEO Bob McDonald’s turnaround efforts weren't showing any improvements, and the company also reported lackluster results for the quarter ended March 2013. Activist investor Bill Ackman -- who owns the hedge fund Pershing Square -- has slightly less than 28 million shares of P&G.

It is speculated that Ackman pressured the company into removing McDonald. What could have led Ackman do this? The March 31 quarter reported a slight increase in organic sales of about 3%. Profits were reported to be approximately $2.6 billion, up from $2.4 billion reported for the same quarter last year. Shares, which were trading at an all-time high of $82.54, fell about 5% after the poor earnings report. A few reasons for P&G "under-earning," as described by Pershing Square, are listed below: 

Source:  Pershing Square

Competitors and the road ahead

P&G has been facing stiff competition from the likes of Colgate-Palmolive, Johnson & Johnson (NYSE: JNJ), Unilever and L'Oreal.

Colgate-Palmolive offers a wide variety of home products, but its major business segment has been the oral care industry. For the same quarter during which P&G reported lackluster earnings, Colgate-Palmolive reported earnings of $1.32 per share, up from $1.24 for the same quarter last year. Colgate-Palmolive has been a shareholder-friendly company, consistently paying dividends to its investors. For the last fiscal year, it paid dividends of $1.22 per share.

The earnings growth for Colgate-Palmolive has been quite impressive; the management expects year-over-year earnings growth for fiscal year 2013 to be around 5.5% to 6.5%.The company has also announced a $10 million cost reduction program where it aims to improve its net manufacturing margin by 5% each fiscal year.The following table makes a comparison between the valuations of both Colgate-Palmolive and Procter & Gamble-

Source - Yahoo! Finance, (P/E ratio is trailing-12 months)

Compared to P&G, Colgate-Palmolive looks overvalued to me. A high price-to-operating-cash-flow ratio as compared to P&G indicates that the company doesn't have significant cash flow to reinvest in the business.The dividend yield is also low as compared to P&G. High valuation multiples and a high debt-to-equity ratio as compared to P&G makes me bearish on this stock.

Johnson & Johnson delivered solid first-quarter earnings results. It reported EPS of $1.22 per share, with the domestic sales increasing by 11.2% and international sales increasing by 6.3%. The company has confirmed its earnings outlook for the full fiscal year 2013 of $5.35 to 5.45 per share. The following chart shows a comparison of the stock performance of P&G and Johnson & Johnson:  

 

Source - Yahoo! Finance

Shares of Johnson & Johnson recorded a 52-week high of $85.90 on April 29. After a dull performance over the last three years, shares have finally been performing well and rising steadily from the $62 level in June 2012. After seeing a decline in P&G's stock from $65 to around $44 in the first quarter of fiscal year 2009, the stock recorded a 52-week high of $82.50 on April 23.

The table below shows a comparison between P&G, Johnson & Johnson and the industry. 

Even though J&J's stock performance has been impressive, P&G is better valued than Johnson & Johnson. Johnson & Johnson is currently trading at a higher P/E and P/S multiple as compared to P&G's stock. Because P&G has both P/E and P/S multiples well below the industry standards, a value investor would surely be attracted to P&G. A growth investor looking to add high-earning companies to his portfolio would also consider the stock given its high EPS of $4.46.

P&G overhaul

There have been reports surrounding P&G of a new company structure wherein the company would divide itself into four sectors. Each unit would have its own president, who would then report to A.G. Lafley. P&G also laid out plans to improve its performance in developed markets, while maintaining its momentum in developing markets. Moreover, the company plans to generate an additional $10 billion by 2016 through its cost-reduction and productivity improvement plans.

Foolish bottom line

The consumer-goods stocks act as an inflation hedge and also provide great diversification benefits to the portfolio. P&G is better valued than both Colgate-Palmolive and Johnson & Johnson. Considering the changes that P&G is looking forward to, I am bullish on its stock. With the old CEO back in action, it surely is a good buy!

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usha patodia has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and Procter & Gamble. The Motley Fool owns shares of Johnson & Johnson. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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