Will P&G Ever Turn Around?

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Amid sagging sales and falling volumes, consumer-staples giant Procter & Gamble (NYSE: PG  ) has done little lately to earn its reputation as one of the best-run companies in the world. Will the recently announced sale of its pharmaceutical business to specialty-drugs developer Warner Chilcott (Nasdaq: WCRX  ) mark a turning point?

Premium brands lose appeal
First, let's understand that the global recession has been tough on P&G. Price increases on items ranging from Tide and Era to home- and dish-care products have turned away budget-conscious consumers. Meanwhile, competitors such as Unilever (NYSE: UL  ) and Colgate-Palmolive (NYSE: CL  ) have been able to keep a tighter grip on volumes. That puts any move Procter & Gamble makes under the microscope.

The Warner Chilcott deal is expected to net P&G $1.4 billion after tax, or about $0.44 per share. In exchange, P&G will relinquish its prescription drug product pipeline, along with established treatments such as osteoporosis drug Actonel. The logic, according to CEO Bob McDonald, is that P&G will be able to focus on its consumer health care business, where brands include Crest, Tampax, and Prilosec OTC.

Growth ahead?
It's difficult to know what form such focus will take. Some investors would undoubtedly like to see the company innovate on higher-margin premium brands. However, the better strategy may be to broaden the product portfolio into the value-price segment -- even if lower prices mean slimmer margins -- thus winning over more cautious consumers. Should P&G decide to compete on a price and value platform, look for new products in the OTC pain relief, cold, and flu remedy categories, where consumers are most likely to trade down to store brands, versus greater brand loyalty in the areas of cosmetic and skin and hair care.

In the meantime, I'd caution against unwarranted optimism. Management's move to open Mr. Clean-branded car washes doesn't exactly smack of a laser-like focus on its core business. Speaking specifically of divestitures, in past years, the company sold food brands Folgers, Jif, and Crisco to J.M. Smucker (NYSE: SJM  ) . Given Smucker's recent quarter, holding onto those brands might've boosted P&G's recession-era performance.

The market gets it right
A common argument for buying P&G shares is that they're undervalued. Sure, the stock's P/E is low compared to historical averages, not mention many competitors' shares. Still, respected consumer names such as Kimberly-Clark (NYSE: KMB  ) and ConAgra (NYSE: CAG  ) go for lower forward multiples. Given that P&G is, from a certain perspective, a turnaround story that's yet to turn, this pricing appears warranted to me.

But if you do decide to jump in with a wad of dough and yellow rubber gloves, keep a close eye on company developments. This isn't the blue-chip company that your mother told you to buy and forget for 10 years. At least, not anymore.

Related Foolishness:

Procter & Gamble, Kimberly-Clark, and Unilever are Motley Fool Income Investor picks. Unilever is also a Global Gains selection. J. M. Smucker is an Inside Value selection. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak does not own shares of any company mentioned. The Fool has a squeaky-clean disclosure policy.

Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2009, at 4:22 PM, cpa28 wrote:

    I spent ten years with a top ranked competitor of PG. All I can say is compete with them at your peril. You will probably lose. They ran CL out of the detergent business. Can you think of a product made by KMB, which I own as well as PG, that does not have a superior counterpart that commands a higher price, made by PG? The stock may be down, but the company is far from out. The long run will reflect that in the stock price.

  • Report this Comment On August 25, 2009, at 4:39 PM, DBrown7 wrote:

    P&G is a turnaround story? Huh? Business is soft with premium brands due to a bad economy. Do you think maybe that P&G has been through this a few times in its 170 year history?

    This is not a poorly run company that needs to turn its business around. As they have in the past, P&G will adjust pricing and tighten their control on costs until the economy improves. Anyone think Warren Buffett is concerned about his multi billion dollar holding?

  • Report this Comment On August 25, 2009, at 5:08 PM, plange01 wrote:

    p+g will trade in this range for years....

  • Report this Comment On August 25, 2009, at 11:39 PM, XMFGlide wrote:

    cpa28 & DBrown7 -- I hear what you're saying, but to assume that P&G's resilient past is prologue takes for granted that (1) consumer attitudes/behavior will return to the pre-recession norm -- a view that deserves to be challenged IMO; and (2) that P&G's product portfolio is as well matched with consumer preferences today as it has been throughout the company's long history. I certainly don't argue the company's historical dominance, but there's probably multi-decade periods during which one could have profiled AIG, GM, or Citigroup in the same positive light (not that I believe P&G's prospects to be similarly imperiled).

    Moreover, during former CEO Lafley's 2000-08 tenure, increases in R&D spending failed to keep up with revenue growth, and currently, the company appears more focused on acquisitions (think car washes and high-end grooming brands) than internal innovation. Combine that with the growth of private label in recent years and P&G's under-performance vs. peers, and yes, I do think it's fair to talk about a turn around.

    plange01 -- I agree that this is a possible outcome, if the company fails to reverse volume declines.

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