Grabbing readers in a crowded news marketplace requires trying to make even the unexciting exciting. That's why it was so lucky for us writers that Procter & Gamble (NYSE: PG) announced in its fourth-quarter earnings call that it had just released a breakthrough moisturizing cream that actually reverses your skin's age by 20 years! How exciting is that?
OK, so that didn't happen. Actually, like most P&G quarters, there really wasn't too much that was overly thrilling about it, despite the fact that some news agencies did their best to make it sound more exciting. "Procter & Gamble Gets Hammered" wrote The Wall Street Journal, while the Financial Times added "P&G and Colgate suffer sluggish sales".
Not as bad as it sounds
Truth be told, it wasn't a great quarter. Volume gains easily outpaced actual sales growth as foreign exchange and product mix pushed prices down. To some extent, this isn't really that terrible, though. As is the case with many multinationals, P&G is trying to expand its presence in higher-growth developing markets. In practice, though, this often means winning customers in those markets with lower-priced goods than what developed-market customers typically purchase.
Meanwhile, the idea is that as these markets continue to develop, there will be a growing base of customers now used to P&G brands that will trade up to higher-priced goods as they become more wealthy. The company has targeted China as a region where this eventual trade-up could have a huge impact.
Though it doesn't make headlines the way earnings per share and sales do, market share is a major driver for a branded-goods business like P&G. During the quarter, management said that the company grew market share in all of its geographic regions while growing or holding steady the market share in 12 of the company's top 17 countries and 16 of its 23 billion-dollar brands.
As for those headline numbers, sales were shy of Wall Street's mark, but earnings per share topped estimates by a penny.
Maybe cause for concern
Though I'd hardly say the quarter's results were reason for shareholders to head for the hills, there were a couple of things that they'll want to keep an eye on in coming quarters. Commodity costs are rising and eating away at profitability. This isn't just a P&G thing, we've recently heard similar things out of Coach (NYSE: COH), Kimberly Clark (NYSE: KMB), and Sherwin Williams (NYSE: SHW). With the economy heating back up, it seems more likely that commodity pressures will continue, so P&G and the others will need to find a way to mitigate it on the supply end or raise prices on the demand end.
Meanwhile, developed markets were more sluggish than expected. Again, this isn't an issue specific to P&G: When Colgate-Palmolive (NYSE: CL) announced earnings yesterday, we heard a similar story there. I've been watching the issue of private labels -- the goods sold by retailers like Kroger (NYSE: KR) and Target (NYSE: TGT) -- for a while now and wonder if this has something to do with the slow sales in the developed markets. If that is the case, we'll have to wait and see whether consumers start to trade back up to pricier branded goods as they feel more confident in the economic recovery.
In all, it was a less-than-ideal report from P&G, but nothing (yet) that investors should get particularly worked up over. Shares currently yield 2.9% and, based on the mid-point of management's 2011 guidance, trade at 16.3 times forward earnings. They could still make an OK buy at this level even though they're not particularly cheap, but there certainly doesn't seem to be a reason for current shareholders to be sellers.
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