Is Procter & Gamble on Track?

As the global economy kept on facing headwinds, the FMCG (Fast-Moving Consumer Goods) giants, Procter & Gamble (NYSE: PG  ) , Colgate-Palmolive (NYSE: CL  )  and Unilever (NYSE: UL  ) didn't do a great job this year. The Ex-CEO of Procter & Gamble, Bob McDonald, was under constant criticism as the company's growth struggled at home and abroad. In such frustrating times, the board decided to call back their celebrated former CEO, A. G. Lafley, to rekindle the growth. Will Lafley be able to deliver according to the investors' expectations? Let's have a look at P&G in detail.

First quarter analysis
Procter & Gamble's first-quarter report shows that its vigorous marketing strategies and increased product innovations are finally paying off. The company earned $1.04 per share in the first quarter of 2014, representing an 8% increase from the comparable quarter of the previous year. Net sales amounted to $21.21 billion, an increase of 2% from the previous year. Analysts on Wall Street had estimated net sales to be $20.05 billion.

Lafley called the previous year a "stepping stone" and current year "transitional," hoping that the four newly founded business segments will boost the efficiency of the company. The company has reiterated its strong outlook for the fiscal year 2014 as it expects its organic sales to increase by 3%-4% and earnings per share to grow by 7% – 9%. 

What is Lafley up to?
Under Lafley, the company is going to restructure its household care and beauty and grooming units into four major blocks, each focusing on a particular industry. These four blocks include Global Baby, Feminine, and Family Care; Global Beauty; Global Health and Grooming; and Global Fabric and Home Care. The restructuring is going to help the company lower its operating costs as it focuses on troubled areas and pinpoints the problems faced in a particular industry. Moreover, it will make sure that the company invests in revenue-driving products rather than on slow-growing items.

According to Lafley, the new restructuring (which will be done in the middle of next year) will also facilitate more product innovation at the company. In the past, product innovation was always a central theme at Procter & Gamble. Recently, the company earned the honor of being on the Top 100 Global Innovators' list developed by Thomson Reuters. A remarkable 6% year-over-year growth in the Baby, Feminine, and Family Care segment is a direct result of increased product innovation.

Beauty and personal care analysts at CosmeticsDesign.com believe that the "multifunctional" products will lead the future growth instead of typical "anti-aging" products as consumers want to save up on time and money. Furthermore, the consumers are demanding "free from" and "natural products". As Procter & Gamble focuses on more natural and multifunctional products, the company's CFO Jon Moeller hinted at major innovations in beauty business that will come out at the end of this year. The beauty care segment saw a sluggish growth of 1% during this quarter, but with the company rolling out new products this year this figure is bound to go up.

The emerging markets have grown to become one of the biggest markets for Procter and Gamble. In 2013, P&G's 39% net sales came from the developing markets, indicating the growth potential of the region. To gain further from the burgeoning middle class with higher disposable incomes, the company plans to capitalize more on these markets. As a result, the emerging markets will continue to contribute toward the company's growth in the future.

Fundamentals
Procter and Gamble has a low forward price-to-earnings ratio of 18.3 as compared to the industry average of 18.9. Its price-to-book stands at 3.47, which is lowest among its competitors; this supports my belief that it's an excellent value at this stage.

Free cash flow per share for Procter & Gamble, Unilever, and Colgate-Palmolive are 1.31, 0.71, and 1.51, respectively. The free cash flow for Procter & Gamble is much higher than Unilever, but it's lower than Colgate-Palmolive. On closer inspection, though, we see that Colgate-Palmolive has financed much of its cash through borrowing as its debt to equity ratio is 263 as compared to 27 at Procter & Gamble. This shows that P&G is generating a lot of cash through its strong operating activities.

Competitors
Unilever experienced a difficult time in the last three months. In the most recent quarter, the company experienced a slowdown in its sales growth; it went down to 3.2% from 5% in the previous quarter. This was mainly due to a downturn in the company's developing markets as the sales growth dwindled to 5.9% from the previous quarter's 10.3%. As the currencies in the emerging markets depreciated against the Euro, Unilever's revenue in the emerging markets slipped. The company expects to get back on track as it has planned upward price revisions in the developing markets on select products.

In the most recent quarter, Colgate-Palmolive posted per-share earnings of $0.73. The earnings increased almost 6% year-over-year as they stood at $0.69 in the comparable quarter last year. The earnings were in line with the analysts' expectations at Reuters. Additionally, the management has reaffirmed that the company will generate growth of 4.5% to 5.5% this year; this shows that the company is on the right track. Management is also targeting double-digit earnings growth in 2014, indicating that it is confident about the company's future prospects.

Final words
I strongly believe that Procter & Gamble will perform well in the future as it has restructured itself for increased efficiency. The company has given a rosy outlook for the rest of the fiscal year and seems to be on track for delivering results. Its financial outlook is strong, and the company's stock will definitely appreciate as I believe it is undervalued right now. Product innovation will act as catalyst for increased profitability.

Taking all of this into consideration, I believe that P&G will turn out to be a good investment choice as it is bound to grow in the future. 

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