Wednesday, August 5, 2009

Lots of detail in Procter & Gamble's earnings release (PG)

AlphaNinja - It's being widely reported that earnings at Procter & Gamble (PG) were down year-over-year, yet not many news outlets are noting that it's because the Folgers division was sold -->> adjusting for that, earnings would be up 8% for the full year. Shares are down 3.7% despite the company beating estimates -->> the street may have been hoping for better forward guidance, which was only in-line with estimates.

For the just-reported fourth quarter (and adjusted for the Folgers divestiture), earnings were up 6%. Most impressive to me is the focus on cost control, which increased operating margin 120 basis points, as the company took advantage of weak advertising markets and passed along price increases to customers:

"Operating margin increased 120 basis points, which included 80 basis points of incremental restructuring charges related to the Folgers transaction. The increase in operating margin was primarily due to higher gross margin and lower SG&A as a percentage of net sales. Gross margin increased 90 basis points driven by the full impact of price increases as the impact of higher commodity costs moderated versus prior quarters. SG&A as a percentage of net sales was down 30 basis points primarily due to a reduction in marketing costs including lower media rates."

At $53.50, shares are well off 52week highs in the $75 range, as the company expects earnings to drop in 2010. My money is on that outcome proving conservative, based on the company's intense focus on cost controls. The stock is trading at a forward PE of 14, well below P&G's long-term average of 20. Next year's earnings estimates of 3.76 implies Free Cash Flow (at just a little above net income) of $11.2billion, so an FCFY (Free Cash Flow Yield) of 7.5% -->> not as cheap as March's 9%, but not bad either. I'd be a buyer over a seller at this level, as this is a great company at a reasonable price.

The whole release is worth a read -->> the company's segment commentary offers good economic insight on the "trade-down" psychology among the company's brands, as well as an example of a market leader protecting pricing despite a terrible economic environment.

Pg Earnings 080509

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