Hurricanes Katrina and Rita hit businesses hard, forcing many to adjust their financial expectations. But not Procter & Gamble (NYSE:PG), which issued a press release following each hurricane to let investors know that everything was on track. Today, without much fanfare, P&G kept its promise and released first-quarter earnings that were actually a penny ahead of expectations.
That's a positive surprise, but not a huge one. P&G is a well-run company with a stable of brands that includes Tide, Charmin, Pampers, and Pantene. The company should be able to overcome a fair amount of adversity.
Despite the hurricanes, which took a chunk out of the earnings and sales of the company's coffee operations, P&G delivered sales 8% higher than last year's; operating income was up a solid 10%. Net income grew only 4%, hampered by debt incurred to finance share repurchases and expenses related to the acquisition of Gillette. The company's share repurchases enabled its earnings-per-share growth to rise 10%, more than twice as fast as its net income.
Next quarter will mark the first one with Gillette on P&G's books. Because of the acquisition, the company is forecasting robust sales growth of 23%-26%, but share dilution from the acquisition will reduce earnings to somewhere between $0.66 and $0.69 per share, below last year's $0.74 per share. Still, buying P&G isn't about a penny a share here and there, or even one year's performance. It's about the long-term potential of the brands and the company's ability to grow them.
P&G deserves heaps of praise for not only providing a statement of cash flows, but also comparing its free cash flow performance with its net income performance. (The company calls it "free cash flow productivity.") In the long term, P&G seeks free cash flow results that compose at least 90% of net income, which would be a very solid performance. For this quarter, the company fell just short with 87% productivity; it's still a large improvement over last year's 77% productivity.
Many components of the Dow Jones Industrials are attractively priced now, or nearly so. Wal-Mart (NYSE:WMT), 3M (NYSE:MMM), and United Technologies (NYSE:UTX) are in that mix, and P&G isn't too far behind. It's a little too rich for my blood at 21 times trailing earnings, but this is a company with an amazing group of brands. P&G should deliver good future performance through both unit-sale growth and pricing power.
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Nathan Parmelee likes P&G's 2% dividend yield but has no financial stake in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
