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Dow-30 Earnings: Procter & Gamble - Third Quarter Fiscal 2013
Consumer products giant Procter & Gamble (PG - Free Procter & Gamble Stock Report) recently reported fiscal third-quarter results (year ends June 30th). Net sales rose 2%, to $20.6 billion, which was about $150 million short of the consensus target and almost $180 million below our estimate. Gross margins improved slightly thanks to productivity improvements and cost savings, but SG&A expenses ticked up a bit. Consequently, operating income rose in line with revenues, to $3.9 billion. P&G did, however, buy back $1.0 billion worth of stock during the interim, which propelled share-earnings growth to 5%. (We opted to exclude relatively small charges related to restructuring and the devaluation of the Venezuelan bolivar.) The bottom-line growth was well ahead of the 1%-2% gain both Value Line and Wall Street Analysts, on average, were looking for.
As noted above, sales were up 2% in the March quarter, as volumes increases of 2% and a positive pricing impact of 1% were offset by foreign exchange headwinds of 1%. Management said that the company held or increased market share in businesses representing about half of total sales, though this was due to a combination of a strong domestic performance and a soft environment overseas.
On a segment-by-segment basis, the Beauty group realized a 2% top-line decline, owing to heavy promotional activity and fierce competition on the hair and skin care fronts. Elsewhere, market contraction nicked the performance of the salon/professional division. Still, the segment's after-tax earnings were up 2% thanks to higher pricing, manufacturing savings, and a lower tax rate.
The Grooming business also experienced a 2% dip in sales. Market contraction, competitive activity, and inventory adjustments at major retailers got the best of the appliances division, but blades and razors revenues rose nicely thanks to better results in developing regions. Despite the group's lackluster showing on the top line, after-tax earnings were up 12% thanks to improved pricing, overhead savings, and better productivity.
The Health Care segment provided the biggest boost to P&G's quarterly results, as sales surged ahead by 8%. The oral, feminine, and personal health care units all added to the strong showing, thanks to portfolio expansion, market growth, and penetration in developing areas. The harsh cold and flu season also helped out the personal care division. Segment income on an after-tax basis increased significantly, rising by 20%, thanks again to overhead savings and productivity gains.
The Fabric Care & Home Care business reported a flat top line. Top brass said that strong innovation and geographic expansion on both fronts was offset by a soft product mix and foreign exchange (it appeared as though volume growth was disproportionate in developing regions). After-tax income fell here, due to increased marketing outlays. Weak high-margined battery sales (following customer inventory reductions related to Hurricane Sandy) also hurt earnings.
Finally, the Baby Care & Family Care segment notched a 3% top-line gain in the fiscal third period, thanks to new product rollouts and underlying market expansion. Stronger pricing on both fronts enabled the group to report a 6% after-tax gain on the bottom line.
We have made some adjustments to our fiscal 2013 sales and share-earnings estimates. We knocked $200 million off our top-line call, which now stands at $84.5 billion. This is at the low end of management's implied guidance range of $84.5 billion-$84.6 billion. We are also clipping a nickel from our share-net target, which now stands a $4.00. This figure is in the middle of company expectations, which are $3.96-$4.04 a share. Margins will probably not expand as much as we previously thought, and P&G will be more reliant of share repurchasing activity to hit its target than we expected it would be three months ago (the Board recently raised the stock-buyback estimate by $1.0 billion, to $6.0 billion worth of shares this year).
Investors were disappointed with the consumer products company's recent performance, as expectations were that P&G would beat guidance. This, coupled with some broader market softness, led to a 5% selloff in the early trading following the earnings release. Still, PG stock offers investors a conservative income vehicle that should continue its slow and steady ascent over the long haul. In fact, the Board recently boosted the dividend payout by 7%, and 3- to 5-year appreciation potential here is now about average.
About The Company:The Procter & Gamble Company makes detergents, soaps, toiletries, foods, paper, & industrial products. Brands include: Always, Head & Shoulders, Olay, Pantene, Wella, Actonel, Dawn, Downy, Tide, Bounty, Charmin, Pampers, Folgers, Iams, Pringles, Gillette, MACH3, Braun, and Duracell. Acquired Gillette in October, 2005, and divested Folgers in June, 2009. U.S. sales accounted for 37% of total revenues last fiscal year, while Wal-Mart Stores (WMT – Free Wal-Mart Stock Report) accounted for 15%.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.