Procter & Gamble (NYSE:PG), the consumer staples titan behind brands such as Charmin, Pampers, Bounty, Crest, Tide, Gain, and Dawn, has watched its stock widely underperform the overall market over the last 52 weeks. However, a few strong earnings reports could get it back on an upward track. The company just announced that it has scheduled its fourth-quarter results for release on August 1, so this could be the turning point we have awaited. Let's break down the last quarterly report and the expectations for the upcoming release, and then check in on one of its largest competitors, Kimberly-Clark (NYSE:KMB), to determine whether now is the time to initiate a long-term position.
The most recent quarterly release
P&G released its third-quarter report on April 23 and the results were mixed compared to the consensus analyst estimates; here's an overview:
|Earnings Per Share||$1.04||$1.02|
|Revenue||$20.56 billion||$20.73 billion|
Earnings per share increased 5.1% and revenue decreased 0.2% year-over-year, as organic sales increased a strong 3%. Global volume increased 3% as well, led by 6% growth in P&G's fabric and home care segment and 2% growth in both the grooming and health care segments.
Gross profit decreased 2.9% to $9.96 billion and operating profit increased 1.6% to $3.46 billion, as the gross margin contracted 140 basis points to 48.4% and the operating margin expanded 30 basis points 16.8%. The contraction of the gross margin stemmed from a 2.5% increase in cost of goods sold and the expansion of the gross margin was helped by a 5.1% decrease in selling, general, and administrative expenses.
P&G generated $3.17 billion of free cash flow during the quarter and this, paired with the $5.95 billion in cash and cash equivalents it had to begin the quarter, enabled it to pay $1.69 billion in dividends and repurchase $1.5 billion worth of its common stock. The company ended the quarter with more than $8.18 billion in cash and cash equivalents, so it will likely use this and its future free cash flow to continue to maximize shareholder value.
In summary, it was a good quarter for P&G in terms of quarterly performance and it was fantastic in terms of returning capital to shareholders, but the stock reacted by falling 1.1% in the next trading session. The shares have fluctuated quite a bit in the weeks since, but maybe the fourth-quarter report will help P&G get its footing and enable a sustained rally higher.
Expectations & investors should watch for
P&G has scheduled its fourth-quarter report for release before the market opens on August 1; this is what analysts currently expect the company to accomplish:
|Earnings Per Share||$0.91||$0.79|
|Revenue||$20.56 billion||$20.66 billion|
These estimates call for P&G's earnings per share to increase 15.2% and its revenue to decrease 0.5% compared to the fourth quarter of fiscal 2013. Key metrics aside, investors will want to watch for four other statistics and updates:
- Fiscal 2015 Outlook: It will be absolutely crucial for P&G to provide an outlook on fiscal 2015 that meets or exceeds the consensus analyst estimates; currently, analysts polled by Estimize predict earnings per share of $4.50 and revenue of approximately $86.13 billion.
- First-Quarter Outlook: While providing a satisfactory outlook on the full year of fiscal 2015, it will also be important for P&G to provide an adequate outlook on the first quarter; currently, the consensus analyst estimates call for earnings per share of $1.15 and revenue of $21.36 billion, which would represent year-over-year growth of 9.5% and 0.7%, respectively.
- Restructuring Update: Watch for any updates regarding the status of the restructuring that the company is currently undergoing. P&G began restructuring itself in 2012 with a focus on merging its international units to reduce expenses and enhance productivity, but it has not given us detailed updates or an estimated completion date, so hopefully the company will provide this information.
- New CEO Announcement?: A.G. Lafley, who served as president and chief executive officer of P&G from 2000-2009, returned to the company in 2013 to head up the aforementioned restructuring; however, it has been clear from the start that he will not remain with the company much longer after its completion, so it would be great if the company put the takeover speculation to rest and named Mr. Lafley's successor.
If P&G can meet or exceed analysts' earnings expectations and satisfy their outlook projections, its stock will likely receive a warm welcome from the market on the day of the release. With this being said, I believe P&G represents a great value today, so investors should consider buying it for the long term, rather than just making short-term trades around the earnings report. Long-term investors can also rest assured that P&G's bountiful dividend will provide protection to the downside if the earnings results come in weaker than expected.
Kimberly-Clark: An indicator to watch
Kimberly-Clark, one of P&G's largest competitors and the company behind brands such as Huggies, Pull-Ups, Cottonelle, Scott, and Depends, has scheduled its second-quarter results for release on July 22. Kimberly-Clark will give us a direct insight into the condition of the industry and strength of the consumer, so P&G investors will want to watch the release very closely. Here's what analysts currently expect Kimberly-Clark to report:
|Earnings Per Share||$1.49||$1.41|
|Revenue||$5.31 billion||$5.27 billion|
The estimates above call for Kimberly-Clark's earnings per share to increase 5.7% and revenue to increase 0.8% year-over-year, and the company will likely build on the $773 million it returned to shareholders via its dividend and share repurchases in the first quarter. Also, since we are focused on P&G, here are two very important sets of information to watch for in Kimberly-Clark's report:
- Global volume: Investors will want to watch for Kimberly-Clark's volume growth during the quarter, because this will show whether demand grew for consumer staples; the company will also break this information down by segment and region.
- Outlook: Watch for Kimberly-Clark's outlooks on the third quarter and full year of fiscal 2014; these sets of data will show what the company expects over the next six months and will give us a strong feel for what to expect when P&G releases its outlook.
All in all, I believe Kimberly-Clark represents a great investment opportunity in itself, so if you are not sold on P&G, take a deeper look at it; however, those who are interested in P&G should still watch its earnings release closely as it will be a strong indicator of things to come.
The Foolish bottom line
Procter & Gamble is an American icon, but its stock has not performed accordingly over the last several months. Its fourth-quarter earnings are due out on August 1 and I believe strong results will jump-start the stock and help get a rally going. Foolish investors should strongly consider buying positions right now and adding to them on any weakness following the release, which will allow price appreciation and P&G's 3%+ dividend to provide significant returns over the next several years.
Joseph Solitro has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.