Jager Has Lit a Fire at Procter & Gamble (News) October 28, 1999

Jager Has Lit a Fire at Procter & Gamble

By Richard McCaffery (TMF Gibson)
October 28, 1999

If consumer products manufacturer Procter & Gamble's (NYSE: PG) fiscal first quarter is any indication, the company's plan to reinvigorate its product line and spark sales growth is catching fire.

The maker of brand name products such as Tide laundry detergent, Puffs tissues, and Scope mouthwash reported that net sales (excluding the impact of negative exchange rates) grew 5% to $9.92 billion for the quarter ended September 30. This is big news for a company whose average annual sales grew 2.6% over the last two years.

Although investors need to focus on bottom-line figures such as cash flow and net income, sales are of first-tier importance to every company, especially one that's mature. After all, sales are the lifeblood of a business. Management can tinker with margins and repurchase stock to boost earnings for just so long.

So earlier this year Durk Jager, P&G's new chairman and chief executive, kicked off a plan to boost long-term sales 6% to 8% and net earnings per share 13% to 15% annually for the next five years.

He plans to do it by introducing new products, making acquisitions into high-growth markets like pet food (click here for a story on P&G's purchase of Iams Co.), and further development of promising units like the company's pharmaceutical division.

So far it's working. New products such as Febreze (a fabric refresher), Swiffer (a disposable mop), and Dryel (a home dry-cleaning product) helped increase sales in P&G's fabric and home care division 8% to $3.2 billion this quarter. The purchase of Iams drove sales in its healthcare unit 16% to $799 million, making it the best performer this quarter.

Only the company's paper products division reported declining sales as price pressures offset gains from increased sales of Charmin toilet paper and Bounty paper towels.

P&G reported net earnings (excluding costs related to new initiatives) of $1.2 billion, or $0.88 per diluted share, up 10% from last year's results and in line with analyst expectations.

Investors will have to wait for a look at the company's Q1 balance sheet and cash flow statement, but there's a lot to like judging from the 1999 figures, namely P&G's ability to generate cash from operations. In fact, operating cash flow has increased every year since 1997, even after subtracting the cost of capital expenditures. This is a clear indication that the company's pulling in lots of cash.

The main item of concern is P&G's long-term debt, which tops $6 billion and is more than twice the size of its cash hoard. Last year, interest expense on the debt increased significantly, totaling $650 million. It was one of the main reasons the company reported slightly lower net income in 1999 than in 1998.

The debt in itself isn't a bad thing unless it starts to erode the company's fundamentals. As long as the firm is making good use of the money it borrows -- as it seems to be doing by introducing attractive new products and plowing cash into research and development -- there shouldn't be a problem for a blue chip company like P&G.

Nevertheless, investors should keep an eye on how the company manages its debt, and make sure borrowed capital is creating sufficient returns for shareholders.

Return on equity (ROE) is one way to determine what kind of bang the company is getting from its assets. Over the last two years, P&G has managed to keep its ROE steady at an impressive 31%. For more on how to calculate ROE, check out this link: Return on Equity.

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