Procter & Gamble (NYSE: PG) Looks a Safe Bet

Greek Pick: PG

Despite drags on sales and pressure on margins, this stockpile of American staple brands is making market share inroads across the globe and driving steady growth with a decent dividend to boot. In our estimation, growth is underestimated and Procter & Gamble's P/E ratio overstated as well. Thus, in my estimation, NYSE: PG shares look to provide a 15% return on capital over the next year. But keep your eye on petrochemical prices and commodity pressures as the key risk to a PG investment.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

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Procter & Gamble (NYSE: PG)

12 Month Total Return Target: +15%
Today's Closing Price: $63

This American icon sells products including Gillette Razors, Tide Detergent, Pantene Shampoo, Crest Toothpaste and other products that fill your cabinets. The company is boosting growth via expansion and market share gains into India, China and other emerging and developed markets. Its staple businesses and brands, and clever operational strategy, make it a must own for many institutional portfolio managers most of the time.

Procter & Gamble (NYSE: PG) reported quarterly results today that exceeded Wall Street's views. PG shares settled after spiking on the open, but moved higher into the close. The company reported EPS from continuing operations grew 5.2% in its quarter ended September. It's EPS from continuing operations, which exclude a sold pharmaceutical business, reached $1.02, versus $0.97 in the year ago period. The result exceeded P&G's guidance range of $0.97 to $1.01 and beat Wall Street's view for $1.00, based on Thomson Reuters data.

Procter & Gamble's sales were up 2% in the quarter, to $20.1 billion, falling short of the analysts' consensus for $20.2 billion. P&G made up for the top-line miss though with organic sales growth of 4%; this excludes factors such as acquisitions, divestitures and currency changes. Organic growth was driven by "broad-based volume and market share gains," according to P&G. Volume was up 8%. The company recorded growth in all major geographic regions and in five of its six business segments. P&G also noted market share gains in 13 of 17 countries and in 17 of its 23 billion dollar brands. This is what keeps analysts on board, as the company is making inroads for growth, and also positioning for extra lift out of economic trough.

Several factors are coming into play with regard to P&G's operating environment. Economic recession typically spares consumer staple sector shares, as investors flock to them for their more sure sales of consumer necessities like razors and soap. However, as anyone in a bind will tell you, the use of razors, deodorant, and other so-called necessities will decrease when money needs to be saved badly enough. Thus, even consumer staples can be affected by declines in economic activity, but certainly to a lesser degree than businesses that earn revenues from activities like eating out, travel and the purchase of luxuries.

P&G's sales came under pressure this quarter due to: geographies of operations and product mix (-2%); pricing (-1%); and unfavorable foreign exchange (-3%). Furthermore, Procter & Gamble shed 70 basis points on its gross margin line, due to rising commodity costs. The resin for the plastic bottles it packages its goods within and the paper pulp it uses to produce its paper goods like Charmin and Bounty products have seen steep increase. The company's peers are reporting the same issues, with Kimberly-Clark (NYSE: KMB) posting a 19% earnings decline last week on rising commodity costs. However, the company is not expected to push through costs to consumers, except via new and "improved" product line options for less price sensitive clientele. Instead, the company's CEO, Bob McDonald, says P&G will make up for it in cost savings. In its most recent quarter, P&G cut 60 basis points off its SG&A expense line on improved productivity, lower forex costs, and reduced overhead spending.

P&G continues to be a cash cow, money making machine, producing $2.5 billion in cash flow last quarter and $1.9 billion in free cash flow. The company forecast Q4 EPS from continuing operations will increase 4-10%, to $1.05 to $1.11 per share. That compares to analysts' expectations for $1.11, but P&G looks to have a record of conservative corporate estimation and solid execution. According to Yahoo Finance, PG has beaten the Street four out of the last five quarters. The company set its FY 11 (June) guidance at $3.91 to $4.01, or up 11-14%.

The stock currently trades at a P/E ratio of 15.7X the high end of its FY 11 guidance range, which, it seems to us, it is likely to attain (given its history). Before adjustment for today's result, analysts were looking for $3.97 for the full fiscal year; that will increase at least a couple points to make up for the most recent quarterly result. The P/E ratio sits above the 10% growth forecast for the company's EPS this fiscal year, but PG also offers shareholders a dividend of 3%. Considering the fact that management has likely understated growth, and the fact that this is a half year forecast, not full year, the stock looks worth owning for a seemingly reliable 15%+ return over the next 6-12 months in my view.

My greatest concern though, and what I would suggest prospective investors keep an eye on, is increasing pressure on petrochemical prices and commodities generally. I expect rising resource demand from emerging markets and economic stability-to-growth to again pressure commodity prices, and potentially pricing generally (yes inflation, while the Fed focuses on deflation). Thus, war with Iran is also a bad thing for PG (and everybody else), since it would hike petrochemicals in a hurry. So, with that risk/return analysis I leave you with the rest of the day's EPS reporters.



This article should also interest NYSE: PG peers: Colgate-Palmolive (NYSE: CL), Kimberly-Clark (NYSE: KMB), Avon (NYSE: AVP), Estee Lauder (NYSE: EL), Energizer (NYSE: ENR), Alberto-Culver (NYSE: ACV), Nu-Skin Enterprises (NYSE: NUS), Revlon (NYSE: REV), Inter Parfums (Nasdaq: IPAR), Elizabeth Arden (Nasdaq: RDEN), Blyth (NYSE: BTH), Female Health (Nasdaq: FHCO), United Guardian (Nasdaq: UG), Parlux Fragrances (Nasdaq: PARL), Physicians Formula (Nasdaq: FACE), CCA Industries (AMEX: CAW).

The remainder of the day’s EPS results emanated from: Symantec (Nasdaq: SYMC), Sprint Nextel (NYSE: S), Teradyne (NYSE: TER), International Paper (NYSE: IP), Express Scripts (Nasdaq: ESRX), A.T. 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