Don't let it get away!
Keep track of the stocks that matter to you.
Help yourself with the Fool's FREE and easy new watchlist service today.
After originally getting its mojo back at the end of 2009, consumer-goods giant Procter & Gamble (NYSE: PG ) continues to grow sales and product volume. These improving metrics, however, are taking their toll on profit growth. Judging by share price action, the market doesn't like the trade-off.
Does Mr. Market have it right? Let's dig deeper.
Fiscal 2010 third-quarter sales of $19.2 billion represent a 7% year-over-year gain. Organic sales, which strip out the effects of currency movements and acquisitions and divestitures, rose a lesser 4%. For comparison, two of the company's biggest competitors, Kimberly-Clark (NYSE: KMB ) and Colgate-Palmolive (NYSE: CL ) , recently posted organic sales improvements of 2% and 6%, respectively.
The key to the market's reaction, however, likely rests more with the details of P&G's post-recession strategy than with peer comparisons. Here, we see that lower overall pricing reduced sales by 1%. (Of course, we already had strong indications of this development.) Furthermore, gross margin expansion of 2.9 percentage points dwindled to a 0.8 point increase at the operating line, owing primarily to higher marketing costs. In other words, to sell more goods, P&G is bringing down prices and stepping up advertising.
Ultimately, quarterly earnings per share from continuing operations advanced 6%, to $0.83. Apparently, that wasn't good enough for the market.
Yet those results look decent to me, especially given that we're still in the early innings of P&G's product portfolio shake-up. Moreover, "core EPS," which excludes items such as charges related to health-care reform, gained a larger 10%.
Volume performance was also encouraging; the company posted a monster jump of 7%. True, that figure is less impressive when we consider the volume in the year-ago quarter fell 5%, but it nonetheless shows that P&G is regaining traction with consumers in a major way.
Looking forward, management expects to round out fiscal 2010 with net sales growth of 3%-5% and core EPS gains of 4%-6%. However, the top end of earnings guidance for the fourth quarter fell $0.02 per share short of analyst estimates, which offered investors another excuse to leave shares on the shelf.
The essential point to keep in mind is that P&G needs time to fine-tune its strategy. In terms of developed-market consumers, we likely are in a new normal, at least when it comes to everyday goods. P&G may never again recapture its mid-to-high double-digit income growth of the pre-recession years.
At a forward price-to-earnings ratio of 15.3, those dour possibilities appear priced in. Plus, based on that same forward metric, P&G trades at a discount to cyclicals such as Joy Global (Nasdaq: JOYG ) , Honeywell, Caterpillar (NYSE: CAT ) , and Cummins. Those are all fine companies in my view, but as the economic cycle matures, a company such as P&G could become the relative value leader.
On today's pullback, I once again reiterate my best estimate that P&G is a buy.