FOOL PLATE SPECIAL
An Investment Opinion
By
This morning, as Jager was let go after a 17-month gig as the world's top Tide and Crest marketer, P&G's stock was sent lower again, this time for a roughly 6% loss. Quite simply, Jager had brazenly put his job on the line in March when his company shocked investors and sell-side analysts alike by pre-announcing lower-than-expected fiscal Q3 earnings. The stock promptly dropped 30%. On the ensuing conference call, Jager had solemnly promised the dispirited P&G shareholding masses, "We'll not disappoint you again." Today, the company told investors to expect Q4 EPS flat with last year's $0.55. Analysts had been expecting 16% profit growth in the period, which was actually down from the original 22% growth projection that was sacked earlier this year. Not surprisingly, Jager, 57, has decided to retire from the company.
While it's tempting to think that this is the end of the story, it unfortunately is not. P&G is faced with the same problems today that it confronted when Jager's ascendency was first set in motion nearly two years ago. The company is lacking the kind of top- and bottom-line enhancing new products to carry it forward in the coming years. Indeed, a change in executive leadership may have been necessary, especially considering Wall Street's current razor-thin margin for error. But more things will need to change at P&G besides the executive ranks if the business is to outperform the average U.S. multinational company.
In a shambles is P&G's aggressive growth plan, spearheaded by Jager and centered on a 1997 promise by the company to double its annual sales to $70 billion by the end of 2005. That looks very much out of reach at this point based on today's guidance. Fourth-quarter sales growth is seen between 2% and 3%, which will put fiscal 2000 revenues at around $40 billion, up a mere 5% year-over-year. To hit $70 billion in five years, sales will need to expand at a 12% compound annual rate, or more than twice this year's growth rate. The probability of that occurring seems pretty slim, especially in light of incoming president and CEO A.G. Lafley's comments that the company's official "transition year" will now be stretched from 2000 into 2001.
Longer-term, it's difficult to build a solid thesis supporting a potential market-beating investment in P&G. The company does not have the TV-built advertising advantages it had over its smaller rivals during the 20th century. Gone too is the firm's ability to pass on ever-higher price increases to consumers when the going gets tough, as profit-conscience large retailers and grocers and better-informed consumers continue to wield more power. That has been a major driver behind the stagnant volume growth in recent years at P&G and at other consumer brand companies as well.
As in so many other businesses in today's Internet-empowered world, the key to future market-beating returns for P&G will boil down to better and quicker innovation on the product side of the equation. Last year, the company tried to buy its way to innovations through the purchase of PuR water purification systems maker Recovery Engineering and high-end pet food leader Iams. However, those purchases were not large enough to improve either the top or bottom lines.
Now, judging from Lafley's comments on today's conference call, the company is instead thinking about divestitures. With the recent hubbub in the world of food stocks leading up to this week's acquisition of Bestfoods (NYSE: BFO) by Unilever (NYSE: UN), there is speculation that P&G may consider unloading its food and beverage lineup, which includes the likes of Pringles chips, Jif peanut butter, and Sunny Delight citrus drinks. Right now, product innovation is taking a back seat to profit preservation at P&G, a situation that is rarely attractive from a long-term investing standpoint.
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