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P&G A Model Of Consistency
Higher commodity costs dented the profits of consumer products giant Procter & Gamble (NYSE:PG) during its third quarter, but sales growth was solid and broad based across its divisions. Historical trends support that fact that P&G is the most disciplined player in the industry and should be able to offer investors over 10% annual total returns over the longer haul.
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Third Quarter Recap
Net sales improved 5% to $20.2 billion as organic sales accounted for four percentage points of the growth and positive currency fluctuations made up the other one percent. Growth was steady across all six divisions, rising in the mid to high single digits. The grooming unit reported the highest growth at 8% on higher prices for Gillette razors and blades, which competes with Energizer Holdings' (NYSE:ENR) Schick brand and strong divisional sales trends in emerging markets. The lowest growth rate was still quite respectable at 5% and occurred in the beauty, fabric and home care, and baby and family care divisions. (For more, see Find Investment Quality in the Income Statement.)
Profit trends were more mixed as only the grooming and fabric and home care units posted operating income growth. Snacks and pet care was the laggard as profits fell 24% on higher product costs and negative sales mix. The company also recently announced it would be jettisoning its Pringles Brand by selling it to Diamond Foods (Nasdaq:DMND), though P&G will own 57% of Pringles as part of the transaction. Baby and family care fell 6% and was followed by 1% drops in profit in beauty and health care. (For more, see Short-, Intermediate-, and Long-Term Trends.)
Total company operating income fell 3% to $3.6 billion. Lower income tax expense helped pushed net earnings up 11% to $2.87 billion while share buybacks helped a 16% increase in earnings per diluted share to 96 cents. This missed analyst expectations by a penny.
Outlook
For the full year, management currently projects sales growth between 4% and 5%. Earnings are expected in a range of $3.89 to $3.94 per diluted share for year-over-year growth between 10.2% and 11.6% on a continuing basis.
Bottom Line
P&G should report full year sales north of $82 billion. Last year, over 60% of its sales were outside of the United States. This means the company is exposed in good part to faster growing emerging markets. Over the past decade, it has grown sales at just over 7% annually and profits close to 13% each year over this timeframe. Energizer has come close to these growth levels given its international ambitions, but other rivals including Clorox (NYSE:CLX) and Colgate Palmolive (NYSE:CL) have fallen short with growth in the single digits. P&G's scale and consistency make it the most likely candidate to offer investors double-digit earnings growth going forward. Combined with a current dividend yield of 3.30%, low teens total shareholder returns are a reasonable estimate over the next several years. (For more, see What Are Economies of Scale?)
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TUTORIAL: Stocks 101
Third Quarter Recap
Net sales improved 5% to $20.2 billion as organic sales accounted for four percentage points of the growth and positive currency fluctuations made up the other one percent. Growth was steady across all six divisions, rising in the mid to high single digits. The grooming unit reported the highest growth at 8% on higher prices for Gillette razors and blades, which competes with Energizer Holdings' (NYSE:ENR) Schick brand and strong divisional sales trends in emerging markets. The lowest growth rate was still quite respectable at 5% and occurred in the beauty, fabric and home care, and baby and family care divisions. (For more, see Find Investment Quality in the Income Statement.)
Profit trends were more mixed as only the grooming and fabric and home care units posted operating income growth. Snacks and pet care was the laggard as profits fell 24% on higher product costs and negative sales mix. The company also recently announced it would be jettisoning its Pringles Brand by selling it to Diamond Foods (Nasdaq:DMND), though P&G will own 57% of Pringles as part of the transaction. Baby and family care fell 6% and was followed by 1% drops in profit in beauty and health care. (For more, see Short-, Intermediate-, and Long-Term Trends.)
Outlook
For the full year, management currently projects sales growth between 4% and 5%. Earnings are expected in a range of $3.89 to $3.94 per diluted share for year-over-year growth between 10.2% and 11.6% on a continuing basis.
Bottom Line
P&G should report full year sales north of $82 billion. Last year, over 60% of its sales were outside of the United States. This means the company is exposed in good part to faster growing emerging markets. Over the past decade, it has grown sales at just over 7% annually and profits close to 13% each year over this timeframe. Energizer has come close to these growth levels given its international ambitions, but other rivals including Clorox (NYSE:CLX) and Colgate Palmolive (NYSE:CL) have fallen short with growth in the single digits. P&G's scale and consistency make it the most likely candidate to offer investors double-digit earnings growth going forward. Combined with a current dividend yield of 3.30%, low teens total shareholder returns are a reasonable estimate over the next several years. (For more, see What Are Economies of Scale?)
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by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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