Procter & Gamble (NYSE:PG) released Q2 earnings last week, and things were OK. Not spectacular, not disastrous, just OK. Is "OK" worth hanging onto?
The market seemed to think so at first, bumping shares 5% Friday morning to almost $82 a share. But as the day went on, shares began to languish and closed below $80 for only a slight net gain (handily beating the Dow, though).
The national press was all over the place. "Profit Better than Expected," heralded the Wall Street Journal. But Fox Business News was more bearish, headlining, "Mixed Q2 Results as Margins Dip." Bloomberg felt the opposite: "Profit Tops Estimates as Emerging Markets Help Sales." ABC News saw it for the mixed bag it was: "Profit Falls, Tops Estimates." So, seriously folks, is this good news or bad news for the world's largest consumer products company?
All about the earnings
EPS beat analysts' consensus estimates by a penny, coming in at $1.21 vs. the predicted $1.20. That's respectable, but far from mind-blowing. True, with 2.7 billion shares outstanding even a penny's difference represents $27 million overall. But with analysts' estimates rounded to the nearest penny, it's as narrow a win as they come. Also, it's a penny less than a year ago, when EPS came in at $1.22. All told, it's just OK.
CEO A.G. Lafley predicted better earnings to come in 2014. "We expect strong earnings growth in the second half of the fiscal year driven by solid top-line growth, moderating headwinds from foreign exchange, and productivity savings that build throughout the year," he said.
Those "productivity savings," of course, include layoffs that have already begun. So there, at least, Lafley is walking the walk and not just talking the talk. But what about the growth prediction?
"Solid top-line growth"
This, of course, means either more sales or higher margins, or both. Q2 seems to bode well for Lafley's prediction. Although net income was down nearly 16% from a year ago, organic sales were up by 3-5% in most segments, including Grooming (Gillette, etc.), Health Care (Crest, etc., and also pet foods like Iams), Fabric/Home Care (Tide, Cascade, etc.), and Baby/Feminine/Family Care (Pampers, Bounty, Charmin, etc.).
The one underperforming segment was Beauty Care, which reported flat sales. That has to be especially galling to Lafley, since it's been one of his primary areas of focus since returning as CEO.
However, the numbers don't tell the whole story here. The majority of P&G's beauty lineup saw gains, including Hair Care (Pantene, Head & Shoulders, etc.) and Deodorants (Old Spice, Secret, etc.), but these were offset by sluggish sales in Skin Care (Oil of Olay, etc.).
Overall, I believe Lafley's prediction of organic sales growth of 3%-4% for the year will be on target. On the earnings call, CFO Jon Moeller noted that sales strengthened during the last month of Q2, setting up a strong start to Q3.
But for now, it's doing just OK. So how does "OK" measure up to the competition? Well, it's always tough to compare performance among consumer products giants, simply because no two operate in exactly the same sectors.
P&G's fellow Dow member Johnson & Johnson's (NYSE:JNJ) Listerine and Plax mouthwashes, for example, directly compete with P&G's Scope. But Johnson & Johnson has a massive pharmaceutical business that includes Tylenol and numerous prescription drugs, while P&G does not, so apples-to-apples comparisons are hard to come by.
For what it's worth, though, here's a chart showing how P&G fared in the final months of 2013 compared to its competitors that have also released earnings for that quarter:
|Company||EPS: Oct.-Dec. 2013||Analysts' EPS Consensus||P/E Ratio (TTM)||Dividend Yield|
|Johnson & Johnson||$1.24||$1.20||18.80||2.91%|
|Kimberly Clark (NYSE:KMB)||$1.44||$1.39||22.29||3.02%|
P&G is doing just OK compared to these competitors, too. It returned the lowest EPS and beat analysts' estimates by the smallest amount. But its dividend yield is higher than Johnson & Johnson's and Kimberly Clark's, albeit barely. All four companies are seeing strong growth in emerging markets, but facing problems related to currency issues is an inherent part of doing business in those markets.
This earnings report shouldn't make you sell your P&G shares, since it seems to confirm the company's stated objectives without raising any new red flags. Before buying more shares, though, I'd look at Unilever, given its higher yield and lower P/E ratio.
The real test of P&G's future, though, will come this quarter. P&G has a lot invested in the upcoming Winter Olympics in Sochi, and CEO Lafley has highlighted the unique marketing opportunity the Olympics offer, especially overseas.
Looking at how the numbers-especially the overseas numbers-fare in the wake of the Olympics should let us know if P&G's future is bright, or like this earnings report, just OK.