Should You Gamble on Procter's Second-Quarter Report?

For decades, Procter & Gamble (PG 2.12%) has been the backbone of countless portfolios and mutual funds. Its growth, dividend, and 57 consecutive years of dividend increases have made many of its early investors rich, but the growth has slowed and today's market does not know what to do with it. It is scheduled to report second-quarter earnings on Jan. 24, so let's take a look and see if we should buy Procter & Gamble now or if we should wait to see what the company has to say.

The American icon                                                                                                                      Procter & Gamble, or P&G, is one of the world's leading consumer-goods companies. It is home to the largest lineup of industry-leading brands; in fact, it is home to 25 billion-dollar brands, including Tide, Gain, Downy, Gillette, Charmin, Pampers, Duracell, and Crest. The company currently operates in 70 countries and its products are available in over 180 countries, serving approximately 4.8 billion people.

Last time out                                                                                                                                On Oct. 25, P&G released first-quarter earnings for fiscal 2014. The results were mixed in comparison with analyst estimates and looked like this:

P&G's earnings per share decreased 1% and revenue rose 2.3% year over year, driven by organic sales growing 4%. Gross profit remained flat at $10.4 billion as the gross margin decreased 110 basis points to 49%. In the report, management reiterated its full-year earnings guidance, but reminded investors that second-quarter earnings would be negatively affected by its divestiture of the Western European bleach business and foreign exchange. However, P&G expects that the second half of the year will be much stronger due to continued top-line growth.

Expectations & what to watch for                                                                                              Second-quarter earnings are due out before the market opens on Jan. 24. Here's an overview of the current expectations:

These estimates call for earnings to decline 0.8% and revenue to grow 0.9% from the same period a year ago. Management has been vocal about the low expectations for the second quarter, so these dim projections are no surprise. With this said, the most important information to watch for in the report is an update on the restructuring and the possible announcement of a successor to CEO A.G. Lafley.

P&G has been restructuring since 2012 in order to merge its international units. In the plan, the company will merge its Eastern and Central European unit with the Western European unit and its Indian unit will be merged with its Middle East and Africa unit; these moves will reduce operating costs, enhance productivity, and increase profitability. To head up the restructuring, P&G brought back its old CEO, A.G. Lafley, who was said to be the best man for the job. I believe that the company needs to name the successor to Mr. Lafley, because I do not think he will remain with the company beyond 2014. If investors are updated on these two topics, and in a positive manner, I believe a bad set of earnings numbers could be overlooked.

A run (not walk) to remember                                                                                                    The personal and household products industry showed immense strength in 2013 and the companies within it, like P&G, The Clorox Company (CLX 1.42%), and Kimberly-Clark (KMB 0.73%) rallied hard. Clorox is the giant behind brands such as Clorox, Burt's Bees, Kingsford, Glad, Tilex, and Hidden Valley. Kimberly Clark owns brands that include Kleenex, Cottonelle, Depend, Huggies, Kotex, and Scott. Take a look at the performance of the three companies compared to the S&P 500:

Although these are solid performances and these three would provide even higher returns if you factored in reinvested dividends, all three companies still underperformed the S&P 500's 29.69% gain. I do not see any of these companies or the overall market putting up similar numbers in 2014, but I do believe there are gains to be made. Clorox is my favorite of the three, due to the high growth being shown in its Burt's Bees brand, with Kimberly Clark and then P&G rounding out the rest of the order. Consider buying any of these on significant pullbacks, because there would be upside potential paired with healthy yields of 3%-3.1%. 

The Foolish bottom line                                                                                                              Procter & Gamble is an American titan and a staple of the world's economy. However, it has been struggling over the last few quarters and it is expected to continue reporting flat-to-negative earnings until its restructuring is completed. With second-quarter results due out shortly and dismal expectations, I believe P&G will trade sideways until third-quarter results are released later this year. The only reason to own this stock right now is for its hefty 3% dividend, but I do not think this is enough to entice investors. Watch this one closely and only consider buying it if it pulls back significantly following the earnings release.