Procter A Pretty Safe Gamble

Few companies are considered more defensive than consumer goods giant Procter & Gamble (NYSE:PG). Yet, the company's shares hit a 52-week low on February 4, following a ho-hum second quarter earnings report a few days earlier. Although P&G is feeling the heat from a slowing global economy, it is far from losing its cool. At current valuations, investors should take a closer look.

Quarterly Results
Second quarter sales dropped 3% to $20.4 billion, as a strong dollar lowered reported international revenue. In addition, the company saw a decline in its shipment volumes as a result of declining consumer demand. But stripping out the effect of currency translations and M&A activity, company-reported figures detailed that organic growth was flat to positive in all six product segments (beauty, grooming, health care, snacks & pet care, fabric & home care and baby & family care), with a total organic improvement of 2%. P&G's results were indicative of industry-wide trends. Arch rival Kimberly Clark (NYSE:KMB) recently reported a mid-single digit decline in total quarterly sales, as lower volumes and negative currency trends offset price increases to stem rising commodity costs. (Many factors contribute to a business's profitability. Learn about them in The Characteristics of a Successful Company.)

The sale of Folgers to J.M. Smucker (NYSE:SJM) affected results, as management estimated that 40 basis points of the 90 basis points drop in operating margins was due to "Folgers-related restructuring charges", with the rest coming from higher commodity costs. A $2 billion gain from the sale of Folgers to Smucker boosted net earnings to $5 billion, or up 53% year-over-year, while lower shares outstanding pushed diluted earnings ahead 61% to $1.58 per share. In addition, P&G shareholders became majority shareholders in Smucker, with a holding of 53%. In similar fashion to arch rival Unilever (NYSE:UL, NYSE:UN), which recently disposed of its Lawry's seasonings brand in North America, P&G has moved to jettison slower growing businesses in a move to improve overall top line trends and bottom line profitability.

Net earnings from continuing operations fell 7%, by the company's estimations, as lower sales and higher margins combined to dent profitability. Diluted earnings from continuing operations were reported at 94 cents, or down 2%. For the full year, P&G expects overall sales to decline up to 4% and to remain flat, at best. Furthermore, the company expects earnings to rest somewhere in the $4.20 to $4.35 range, which is a decrease from previous guidance. A key reason for drop in earnings guidance is the stock's weakness since the results were announced. (Looking at the earnings per share helps investors analyze earnings in relation to changes in new-share capital. Learn more in Getting the Real Earnings.)

Bottom Line
Proctor & Gamble's performance, though on the short end of expectations, is about as solid as anyone can expect in today's environment. While sales and earnings could decline further than current projections, the valuation accounts for this potential downside already. At current share prices, P&G trades at 12.2 times forward earnings, or well below the lowest P/E range over the past five years. Although the company can no longer lay claim to being completely recession-resistant, it will hold up as well as any firm out there. Plus, debt levels are very reasonable at under 25% of total capitalization. As recently bankrupt consumer products Spectrum Brands can attest, in today's credit-constrained world, P&G finds itself in an enviable position.