Zacks_Analysts' Blog : P&G In Line, Maintains Outlook - Analyst Blog

Procter & Gamble Co. (PG) reported modest results for the first quarter 2012,with net earnings from continuing operations inching up 1.0% year over year to $1.03 a share, which were in line with the  Zacks Consensus Estimate. Profits were driven by efforts to enhance productivity and cost-saving initiatives.

Procter & Gamble forecasts second-quarter 2012 net earnings from continuing operations and core earnings to be in the range of $1.05 to $1.11 per share, a decrease of 7%-2% compared to core earnings of $1.13 in the corresponding prior-year quarter. The guidance implies that P&G will continue to engage in several innovations and invest in various marketing programs. The Zacks Consensus Estimate for the second quarter is expected to be $1.16 per share.

For 2012, diluted net earnings per share from continuing operations and Core EPS are expected to increase 3%-6% from the comparable period and will be in the range of $4.17 to $4.33.The Zacks Consensus Estimate for fiscal 2012 is $4.21.

Revenue and Margins

P&G’s net sales increased 9% to $21.9 billion in the first-quarter 2012. Excluding the impact of acquisitions, divestitures and foreign exchange, organic sales grew 4% in the reported quarter. P&G’s net sales whiskered past the Zacks Consensus Estimate of $21.6 billion.

While Baby Care and Family Care segmentled thenet sales growth and advanced 12% to $4.1 billion, Fabric Care and Home Care segment’s net sales moved up 6% year over year to $6.7 billion.

Volume wasup by 2%,fuelled by initiatives and continued market expansions. Mid-single-digit growth in developing regions was partially offset by a low single-digit decrease in developed regions.  For the quarter, volume growth was broad-based and was led by double-digit growth in Prestige Products. However, competitive activity in North America dragged the Olay volume down. Additionally, it declined due to a decrease in customer inventories in CEEME Aregion, which was a result of strong shipments in the June quarter.

All geographic regions either remained flat or posted an increase in volume. In the first quarter of 2012, unit volume increased in Beauty, Health Care, Snacks and Baby Caresegments due to investments in innovations like Pantene treatments in Asia, Vicks Nature Fusion and Olay Pro-X Clear in North America, fragrances in Prestige such as Gucci Guilty; and market expansions, such as Pampers Super Dry Premium in China, Oral-B in Western Europe, and Pro Glide in Asia. 

However, unit volume in Grooming segment remained flat year over year, and Fabric Care and Home Care unit logged a decrease of 1% in volume.

Procter & Gamble, the leading manufacturer and seller of consumer goods, projects net sales and organic sales (based on solid volume momentum, partially offset by product mix and pricing) to inflate 3%–5%,backed by continued benefit from pricing, partially offset by unfavorable mix of 1%-2%in the second quarter 2012. For fiscal 2012, net sales and organic sales are expected to grow 3%–6%.

Gross margin for the quarter declined 240 basis points, which was primarily attributable to higher commodity costs and unfavorable product mix.

Operating margin slipped 260 basis points due to lower gross margin and higher selling, general and administrative expenses (SG&A) as a percentage of net sales.

Procter & Gamble exited the quarter with cash and cash equivalents of $2,768 million and long-term debt increased by $1,988 million.

Recommendation

We are encouraged by the company’s expansion of its portfolio of brands, both through internal development and acquisition. However, Procter and Gamble is currently facing high commodity cost inflation and severe competition from companies like Kimberly-Clark Corporation (KMB) and Johnson & Johnson (JNJ) in the Western European markets in both the blade and battery businesses.

P&G holds a Zacks #3 Rank, translating into a short-term Hold rating.