Why Procter & Gamble Is Underrated

Stop the nonsense. This pertains to all the pundits who state that Procter & Gamble (PG 0.54%) isn't what it used to be. Perhaps I'm missing something, but Procter & Gamble holds a leadership position or significant market share in all of its industry segments against peers Colgate-Palmolive (CL 1.07%) and Kimberly-Clark (KMB 0.97%). It sells its products in 180 countries and territories, with on-the-ground operations in 70 countries. However, what's most important is results. 

Recent results
In the first quarter, net sales increased 2% year over year to $21.2 billion with organic sales growing at a 4% clip and unit volume increasing 4%. If that's not impressive enough, then also consider that diluted earnings per share increased 8% to $1.04. Operating cash flow was $2 billion and free cash flow (operating cash flow minus capital expenditures) came in at $1.3 billion. That's a lot of capital available for rewarding shareholders.

The past doesn't guarantee future results. Nor do predictions by company management, for that matter. However, guidance does offer a good clue about what to expect. Procter & Gamble expects strong EPS growth in the second half of fiscal year 2014 thanks to continued top-line growth, productivity savings, and more favorable foreign exchange rates.

Still not sold? If not, consider Procter & Gamble's $1 billion product list, including Head & Shoulders, Olay, Pantene, SK-II, Wella, Fusion, Gillette, Mach3, Crest, Iams, Oral-B, Vicks, Ace, Ariel, Dawn, Downy, Duracell, Febreeze, Gain, Tide, Charmin, and Pampers. Yeah, it produces and sells all of those brands. 

Don't make mountains out of molehills
One of the biggest concerns for Procter & Gamble has been the rise of the value-conscious consumer opting for generic brands in order to save a buck or two. However, Procter & Gamble has still managed to grow its top line. We're not talking about massive growth here. After all, this is a very mature company. However, Procter & Gamble always finds a way to drive the top line, which is often done via innovation. 

When consumers look at the shelves, they're not going to see innovative generic products like Crest Complete Multi Benefit, Febreeze CAR Vent Clips, or Olay Body Collections. Hordes of consumers remain loyal to Procter & Gamble brands. Since these brands offer higher quality, many consumers are spoiled. It's easy to move up in quality, but it's very difficult to move down.

It's probably evident that I'm a fan of this diversified, resilient, dividend-paying behemoth. While the following two companies are smaller in size, it's still possible that one of them offers more investment potential.

Kimberly-Clark and Colgate-Palmolive
Kimberly-Clark (KMB 0.97%) saw flat revenues of $5.3 billion year over year. However, organic sales grew 5%, a big positive since organic sales are the key indicator for demand. It looks like diapers and tissues are still in demand. No surprise there. Kimberly-Clark also raised its full-year adjusted EPS guidance to $5.65-$5.75 from $5.60-$5.75. Furthermore, Kimberly-Clark stated that it's confident about its ability to return capital to shareholders going forward. That's always nice to hear. More on this soon.

Colgate-Palmolive (CL 1.07%) is another stellar company in the Personal Products industry. In the third quarter, net sales increased 1.5% to $4.40 billion, with unit volume improving 5% and pricing moving higher by 1%. Organic sales grew 6%, with emerging market organic sales growing 9.5%.

Colgate-Palmolive President, Chairman, and CEO Ian Cook has many titles. He also stated that Colgate-Palmolive continues to see strong growth momentum on the top and bottom lines, and that operating profit, net income, and earnings-per-share have all increased for 10 consecutive quarters.

Colgate-Palmolive expects diluted EPS to grow 4.5%-5.5% for the year, and it expects similar annual EPS growth in the future. Colgate-Palmolive is the market leader in toothpaste (45% share) and manual toothbrushes (33.4%). It's increasing its mouthwash market share, which now stands at 16.8% (highest it has ever been).

With all three companies so impressive, it might seem difficult to choose one over the other. It would be difficult to go wrong with any of them, but there are some deviations. For instance, Procter & Gamble and Colgate-Palmolive have outperformed Kimberly-Clark on the top line over the past year:

PG Revenue (TTM) data by YCharts

When you look at key metric comparisons, one company clearly stands out over the other two:

Procter & Gamble is the best of the three at turning revenue into profit, it has been the top performer for debt management, it yields as much as Kimberly-Clark and more than Colgate-Palmolive, and it's trading at a more appealing valuation than Kimberly-Clark and Colgate-Palmolive.

The bottom line
All three of the aforementioned are winners. They all know how to cater to consumer demands through marketing and innovation. They're all excellent at driving cash flow and returning capital to shareholders. While Colgate-Palmolive has been growing its top-line faster than Procter & Gamble over the past five years, Procter & Gamble has taken a slight lead recently and it's the most impressive company of the three fundamentally.