We have returned to a Neutral recommendation on
he Procter & Gamble Company
) from Underperform following the better-than-expected fourth
quarter results and impressive plans to restore growth.
P&G's fourth quarter 2012 adjusted earnings (excluding
restructuring charges) of 82 cents per share came ahead of the
Zacks Consensus Estimate of 77 cents as well as management guidance
of 75 cents-79 cents mainly due to a lower-than-expected tax rate.
Nonetheless, earnings were flat with the prior-year levels, as
benefits from pricing and cost savings from restructuring
activities were offset by top-line shortfall and rising commodity
costs. Revenues declined 1% largely due to foreign exchange
headwinds. Organically however, revenues were up 3% as pricing
benefits offset headwinds from product/geographic mix and foreign
exchange. The organic revenue growth was at the higher end of
Slowdown in developed nations and commodity cost increases has
resulted in a series of disappointing earnings results and guidance
cuts for P&G. Other short-term headwinds include business
disruptions in Venezuela, import restrictions in Argentina and
negative impact of foreign exchange. However, the fourth quarter
was much better than past quarters. Overall, we are encouraged by
P&G's strong brand recognition, diversified portfolio, rapid
growth in developing nations, impressive product development
capabilities and marketing prowess.
P&G's products enjoy strong brand recognition and are sold
in more than 180 countries around the world. P&G's 50
Leadership Brands are some of the world's most commonly used
household names, representing around 90% of the company's sales and
profits. These 50 brands include 25 power brands each generating
over $1 billion in revenues. Moreover, P&G is known for its
impressive product development capabilities and marketing prowess.
P&G has consistently increased market share in fast growing
businesses over the years through innovation and new product
launches. The company's drive for innovation and marketing
strategies allow it to expand in more categories, geographies and
channels, thus boosting top- and bottom-line growth.
Further, P&G focuses on improving its product portfolio
through strategic initiatives which enable it to pay more attention
to its profitable businesses. In June, the company completed the
divestiture of its snacks unit, Pringles, to
) to re-focus on beauty and personal care products.
P&G has a strong presence in the fast growing developing
markets as the company sees sluggish growth in developed nations,
principally in North America and Western Europe, due to weak
economic conditions, aggressive competitive activity and market
share declines. Developing markets comprise a $32 billion business
for P&G, the largest developing market business for any
consumer food company. Developing markets constituted about 35% of
global sales of the company in fiscal 2011 and 40% of sales and 45%
of volume in fiscal 2012.
Other than these, the company's solid cash flow generation
capabilities and its cost savings and productivity improvement
allow for investment in product innovations, acquisitions, and
While fiscal 2012 was a tough year for P&G, the company has
laid out plans to improve results in developed markets while
maintaining momentum in the developing nations. Moreover, the
company will increase focus on the most profitable business, its
biggest innovations and further accelerate cost savings. We are
encouraged by the company's strategic plans and thus revert to a
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