Amid sagging sales and falling volumes, consumer-staples giant Procter & Gamble
Premium brands lose appeal
First, let's understand that the global recession has been tough on P&G. Price increases on items ranging from Tide and Era to home- and dish-care products have turned away budget-conscious consumers. Meanwhile, competitors such as Unilever
The Warner Chilcott deal is expected to net P&G $1.4 billion after tax, or about $0.44 per share. In exchange, P&G will relinquish its prescription drug product pipeline, along with established treatments such as osteoporosis drug Actonel. The logic, according to CEO Bob McDonald, is that P&G will be able to focus on its consumer health care business, where brands include Crest, Tampax, and Prilosec OTC.
It's difficult to know what form such focus will take. Some investors would undoubtedly like to see the company innovate on higher-margin premium brands. However, the better strategy may be to broaden the product portfolio into the value-price segment -- even if lower prices mean slimmer margins -- thus winning over more cautious consumers. Should P&G decide to compete on a price and value platform, look for new products in the OTC pain relief, cold, and flu remedy categories, where consumers are most likely to trade down to store brands, versus greater brand loyalty in the areas of cosmetic and skin and hair care.
In the meantime, I'd caution against unwarranted optimism. Management's move to open Mr. Clean-branded car washes doesn't exactly smack of a laser-like focus on its core business. Speaking specifically of divestitures, in past years, the company sold food brands Folgers, Jif, and Crisco to J.M. Smucker
The market gets it right
A common argument for buying P&G shares is that they're undervalued. Sure, the stock's P/E is low compared to historical averages, not mention many competitors' shares. Still, respected consumer names such as Kimberly-Clark
But if you do decide to jump in with a wad of dough and yellow rubber gloves, keep a close eye on company developments. This isn't the blue-chip company that your mother told you to buy and forget for 10 years. At least, not anymore.
Procter & Gamble, Kimberly-Clark, and Unilever are Motley Fool Income Investor picks. Unilever is also a Global Gains selection. J. M. Smucker is an Inside Value selection. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.