Procter & Gamble: Are Analysts' Third-Quarter Earnings Estimates Too Conservative?

Procter & Gamble (NYSE: PG  ) , the consumer-goods giant behind 25 billion-dollar brands, plans to release its quarterly results in the coming days. Although it is in the midst of restructuring its international units, expectations still call for it to show growth from the year ago period. Let's take a look at its most recent earnings release and the expectations for the upcoming report to decide if we should pile into the stock right now or if we should wait to see what the quarter holds.

Source: Procter & Gamble

The last time out
On Jan. 24, P&G released its second-quarter report for fiscal 2014 and the results were mixed in comparison with analysts' expectations; here's a breakdown and a year-over-year comparison:

Metric Reported Expected
Earnings Per Share $1.21 $1.20
Revenue $22.28 billion $22.35 billion

Source: Benzinga

Source: P&G

P&G's earnings per share decreased 1% and revenue came in flat year-over-year, while organic sales grew a strong 3%. All of P&G's segments showed volume growth, led by increases of 6% in health care, 5% in fabric and home Care, and 3% in baby, feminine, and family care. Gross profit declined 1% to $11.15 billion and the gross margin took a slight hit, declining 90 basis points to 50%.

The highlight of the quarter came with the note that the company generated $3.3 billion in operating cash flow, which it used to repurchase approximately $1.5 billion of its common stock and pay approximately $1.7 billion in dividends. Also, the company reaffirmed its full-year guidance, calling for core earnings-per-share growth of 5%-7% and revenue growth of 1%-2%. P&G's stock reacted positively to all of this news by rising 1.8% in the day's trading session and its shares have built on these gains in the months since then.

Expectations & what to watch for
Third-quarter results are due out before the market opens on April 23; here are the current consensus analyst estimates:

Metric Expected Year Ago
Earnings Per Share $1.02 $0.99
Revenue $20.68 billion $20.60 billion

Source: Estimize

Source: P&G

These expectations call for P&G's earnings per share to increase 3% and revenue to rise 0.4% year-over-year. In the second-quarter report, CEO A.G. Lafley stated, "We expect strong earnings growth in the second half of the year driven by solid top-line growth," so it appears that he and the company are much more bullish than analysts. With this said, there are three other factors to watch for in the report:

  • First, it will be important for P&G to reaffirm its full-year outlook once again, and while doing so, provide fourth-quarter guidance that is within analysts' expected range; currently analysts expect earnings per share of $0.93 on revenue of $20.90 billion.
  • Secondly, I would like the company to once again show over $3 billion in operating cash flow and use this to continue repurchasing shares while paying the rest out as dividends. P&G is highly dedicated to maximizing returns to shareholders, so it is a safe bet that this will come true.
  • Lastly, watch for updates on the current status of the restructuring. It would be great if the company gave an estimated completion date, but any update would be welcomed since none were given in the second-quarter report. Also, I would really like P&G to name potential candidates to succeed CEO A.G. Lafley. Mr. Lafley was brought in to head up the restructuring, so it is unlikely that he will stay much longer after the process is completed.

I believe the company will beat these earnings estimates, with organic sales and global volume growth as drivers, and provide guidance for the fourth quarter that satisfies expectations, which will cause the stock to rise following the release; for these reasons, I would be a buyer of Procter & Gamble.

An indicator to watch for
Kimberly Clark (NYSE: KMB  ) , one of P&G's largest competitors, is scheduled to release its quarterly results two days earlier on April 21. Kimberly Clark is the company behind global brands such as Cottonelle, Kleenex, Scott, Kotex, and Huggies, and its earnings report could be a direct indicator for that of P&G; here's a summary of what analyst s expect Kimberly Clark's first-quarter report will hold:

Metric Expected Year Ago
Earnings Per Share $1.48 $1.48
Revenue $5.32 billion $5.32 billion

Source: Estimize

Source: Kimberly Clark

As you can see, analysts expect Kimberly Clark's earnings per share and revenue to remain flat year-over-year. Estimates aside, the company will likely build on the $567 million it returned to shareholders via dividends and share repurchases during the fourth quarter.

In addition, Kimberly Clark expects to benefit from about $330 million in savings over the year as a result of its cost-cutting program and from the restructuring of its tissue formula; this is a major positive for the company and it will help boost Kimberly Clark's profitability in the quarter and going forward.

With all of this being said, Kimberly Clark represents a great investment opportunity on its own, but Foolish investors who are interested in P&G should watch its report closely as it will be a strong indicator of things to come.

The Foolish bottom line
Procter & Gamble is a $219 billion titan in the global marketplace and I believe analysts are too conservative on the third quarter. I think P&G will exceed expectations with results driven by organic sales growth and volume growth across all of its segments and lower-than-expected costs associated with the restructuring, which will lead to a run higher in its share price. For these reasons, Foolish investors should consider initiating positions in P&G going into the report and they can rest assured by knowing that the company's healthy 3.2% dividend will provide downside protection if a miss were to occur.

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