Bearish on Procter & Gamble - Analyst Blog


We recently downgraded our rating on The Procter & Gamble Company ( PG ) from Neutral to Underperform following the guidance cut for the final quarter of fiscal 2012, ending June 2012.

In late June 2012, P&G lowered its sales and earnings outlook for the final quarter of fiscal 2012. For the fourth quarter, P&G expects revenues to decline in the range of 1% to 2% versus prior expectations of growth in the range of 1% to 2%. Organic sales are expected to be up 2% to 3% versus prior guidance of sales growth of 4% to 5%. Foreign exchange is estimated to pull down revenue growth by 4% versus 3% expected previously. Adjusted earnings are expected in the range of 75 cents to 79 cents per share versus 79 cents to 85 cents earlier. The earnings guidance excludes gain of 47 cents to 50 cents on the recent divestment of Pringles to Kellogg Company ( K ).

Management blamed the guidance cut on lower-than-expected top-line growth due to a slowing global economy, sluggish market share growth in the developed countries and China, and foreign exchange headwinds. This marks the second cut in P&G's guidance in the last two months. The company had already reduced its fiscal 2012 top and bottom line outlook at its third quarter conference call due to Venezuela price regulations, rising input costs and economic uncertainty in Western Europe and U.S. In addition, the company provided a disappointing outlook for fiscal 2013.

While P&G sees volume gains in the developing countries, it is witnessing sluggish growth in the developed nations, principally in North America and Western Europe, due to weak economic conditions and market share declines. The developed markets account for almost 60% of the company's sales and a higher percentage of profits. Their underperformance reduced the company's growth by 1 percentage point in fiscal 2011 and continues to hurt results in fiscal 2012.

P&G has also failed to launch a break-through new brand or create a new product category for quite some time now. P&G plans to redress the situation by focusing once again on innovation. Moreover, rising commodity costs are constantly hurting the company's margins. Other short-term headwinds include business disruptions in Venezuela, import restrictions in Argentina and the negative impact of foreign exchange. We have thus downgraded our rating on P&G from Neutral to Underperform as most of these issues are expected to persist and pressure earnings in the near term.

KELLOGG CO (K): Free Stock Analysis Report
PROCTER & GAMBL (PG): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: K , PG

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