Consumer products giant Procter & Gamble (NYSE:PG) reported about a 49% drop in net income in the 2012 fiscal second quarter. During the quarter, net income fell to $1.69 billion from $3.33 billion. Revenue grew 4% to $22.1 billion, thanks in part to higher prices as a result of higher input costs. (To learn more about quarterly earnings reports, check out Everything Investors Need To Know About Earnings.)
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A New Paradigm
Despite the 49% drop in net income, P&G's earnings per share (EPS) of $1.10 during the quarter, exceeded analyst estimates of $1.07. Still, anemic U.S. sales growth combined with rising input costs helped put a lid on the company's quarter. A weaker dollar, which helped boost the value of P&G's foreign earnings, was not helpful this quarter compared to years past. Despite being the world's largest consumer products maker and being behind household brands such as Tide detergent and Crest toothpaste, P&G faces a new paradigm shift. Thanks to continued muscle from retailing giant Wal-Mart (NYSE:WMT) and price competition from online juggernaut Amazon (Nasdaq:AMZN), P&G is competing in a very price sensitive world. As Wal-Mart continues to squeeze suppliers for the best prices, suppliers like P&G have to be flexible as the risk of losing business from Wal-Mart is not an option. And with more and more consumers buying products online, even consumer products face competition from the Internet. (For related reading, see A Guide To Investing In Consumer Staples.)
The Years Ahead
As a result of declining sales volumes, higher input costs and diminishing pricing power, P&G reduced its full year EPS guidance to $4 to $4.10 versus the prior guidance of $4.15 to $4.33, respectively. That still leaves P&G trading at approximately 18 times fiscal 2012 earnings based on the company's recent share price of roughly $63 near a 52 week high of about $67.72. The dividend yield of around 3.3% remains attractive to income seeking investors. By comparison, consumer peers like Johnson & Johnson (NYSE:JNJ) yields about 3.5% and around 18 times earnings, respectively.
The Bottom Line
Given P&G's deep catalog of household brands, including Gillette razors, an improving economy inspires consumers to purchase brand name goods over generics. But as a global giant with nearly $62 billion in revenue, growth becomes tougher and tougher at those levels. (For additional reading, see Great Expectations: Forecasting Sales Growth.)
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.