Higher Supply Costs Trim P&G Profits, Share Price: Buying Opportunity?

Procter & Gamble (NYSE: PG  ) claims it will revolutionize the way we wash clothes when it launches Tide Pods next year, a new concoction in a dissolvable package that the company predicts will quickly become a multi-billion dollar product.

Revolution or not, a new product is rarely a good reason to buy shares of a company that already has $78.94 billion in annual revenues. One new product hardly makes a difference.

But betting on companies whose management teams consistently do their jobs well is a perfectly reasonable strategy. And the folks at P&G appear to have their work down. Year after year, they take the most mundane products -- toothpaste, shampoo, diapers and toilet paper, for example -- and revamp them in ways that entice us to pay more for them. Who would have thought anyone would pay $30 for an 8-pack of razors before Gillette Fusion Pro-Glide?

YCharts marks P&G shares as attractive now, marked by very strong fundamentals and a 3.35% dividend yield. A share price decline last month after the company trimmed its full-fiscal year earnings forecast helped make the shares undervalued.

Procter & Gamble Price Stock Chart by YCharts

P&G is facing a couple of immediate problems that made that recent share price revaluation fair game. Supply costs -- oil and resins, for example -- will be some $1.8 billion higher this fiscal year than last. That's triple the increase in costs P&G expected when it started the year. The company is reluctant to pass on the additional costs to consumers because customers are already dealing with higher food and gasoline costs. Instead, P&G is choosing to protect its market share and preserve its customers. Eating the costs means profit margins narrowing.

Procter & Gamble Gross Profit Margin Stock Chart by YCharts

Sales growth hasn't been stellar either. Always difficult for an old company with the most popular brands, growth for P&G has been non-existent in the U.S. lately. Overseas sales have helped keep underlying growth in positive territory. Acquisitions make the gains bigger.

Procter & Gamble Revenues Stock Chart by YCharts

But P&G can well afford some difficult times. As always with this company, cash flow is great. It tends to return it to shareholders in rising dividends.

Procter & Gamble Free Cash Flow Stock Chart by YCharts

The real question for investors is whether P&G management still has its mojo for making something new and exciting out of products we all have to buy. Warren Buffett probably believes it does, considering he's a big investor in P&G and a big fan of consistently strong management. P&G shares are also popular among hedge funds. Certainly, P&G still has the fundamentals it needs to continue its long-successful strategy, including enough cash to make acquisitions when needed.

Tide Pods won't be a panacea for the company's growth problems. If Pods really catch on, they will replace the sale of other Tide products; a paradox that dents the impact of even a multi-billion dollar success. Rather, for long-term investors, a successful launch offers reassurance that management can still do what it has long done best, and likely will do again.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

Motley Fool newsletter services have recommended buying shares of Procter & Gamble. 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.


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