The Rising Influence of Rising Affluence

[DewDiligence]

The Tide Is Turning at Procter & Gamble—Maybe

[I took the liberty of adding the word “maybe” to the title because untimely calls of a “turn” in PG’s stock by professional analysts have been many. In fact, aside from a few minutes during “flash crash” last May, PG has traded more like a bond rather than a stock during the recent bull market; in other words, it’s been a laggard. Although it’s hardly an exciting name, I do think PG is a beneficiary of The Global Demographic Tailwind and investor will be rewarded in due course for owning it.]

http://online.barrons.com/article/SB50001424052970204395804576162691815918976.html

›FEBRUARY 23, 2011
By JOHANNA BENNETT

A rallying U.S. stock market has left shares of Procter & Gamble in the dust.

Mired at just over $64 a share, P&G (ticker: PG) has been dead money over the last 12 months, making it the second-weakest performing household-products company in the Standard & Poor's 500 index.

To be sure, the consumer products giant, famed for brands such as Tide, Charmin, Crest and Pampers, faces serious challenges, namely high commodity costs and weak demand in the U.S., its home market.

But emerging markets could be the salvation for this company. And though P&G has come late to the game, it sees lots of room for growth in places like Brazil and India.

Add to that cost cuts, price hikes, new products and a rebounding U.S. market, and P&G could finally breathe life back into sales and earnings, as well as its stock price.

At more than 15 times forward earnings, the shares aren't a screaming bargain [but the valuation got a little more attractive in the few days since this article was penned]. But with investors pocketing a 3% dividend yield along the way, P&G could return more than 20% over the next 12 months.

"This is not a valuation call," says Dara Mohsenian, a Morgan Stanley analyst who upgraded P&G earlier this month to an Overweight rating. "This is a blue-chip company that has struggled, but looking forward, I see results improving, and if that happens, you'll see the multiple move up."

Others also seem optimistic.

Last week, Javier Escalante, a Weeden & Co. analyst, launched coverage with a Buy rating. Meanwhile, Abby Joseph Cohen, a Goldman Sachs investment strategist, touted P&G during last month's meeting of the Barron's Roundtable.

With annual sales of roughly $79 billion, P&G is the world's largest consumer-products company, competing with Unilever (UN), Colgate-Palmolive (CL), Clorox (CLX) and others to sell laundry detergent, shampoo, toothbrushes, razors and face cream in dozens of countries.

The company gets 66% of its revenue from developed countries, with the U.S. alone pitching in roughly one-third of total revenue.

For generations, the company focused on boosting U.S. and European sales, pushing only selectively into emerging markets. Today, developing countries generate 34% of sales [yes, 100% minus 66% is 34%—thanks for confirming that, LOL].

But business here and in Western Europe remain tepid thanks to the recession, when many consumers switched to cheaper-priced goods.

Hopes for a recovery and a long history of dividend hikes led Barrons.com to weigh in favorably on the stock several times over the last two years, calls that now seem premature.

Wall Street sees earnings falling for the second consecutive year during the fiscal year slated to end in June 2011, dropping 3% to $3.98 a share.

P&G, however, now faces easier comparisons. It's launched new products, boosted its marketing budget, rolled back promotions and plans to raise some prices soon, including on Duracell batteries.

Consumers remain willing to splurge on premium products, such as Gillette's Fusion ProGlide razors. And fewer shoppers are trading down, says Morgan Stanley's Mohsenian.

P&G, meanwhile, is getting serious about emerging markets, especially India and Brazil, areas where it has traditionally lagged.

The shift has been "spectacular," says Weeden's Escalante, noting that a decade ago, developing countries generated 20% of P&G's sales. By 2020, the company sees that figure approaching 50%.

Morgan Stanley's Mohsenian sees sales in emerging markets growing as much as 10% annually over the next five years.

And during that same time period, P&G's earnings per share could grow at a similar pace, according to Thomson Reuters.

During the fiscal year slated to end in June 2012, the company is expected to earn $4.37 a share. [This is the Street consensus, not PG’s own guidance.]

"P&G needs to show it can accelerate earnings growth and emerging markets is going to be the most significant contributor," says Douglas Lane, an analyst with Jefferies & Co.

Investors will have to pay up a bit for that growth.

At 15.3 times projected earnings over the next four quarters, P&G changes hands at a 10% premium to the broader market. Still, the stock trades below its five-year average.

Of course, turnaround stories are notoriously risky.

The company's size makes growth difficult. Efforts to break into Brazil and India could fail. With 62% of sales generated outside the U.S., currency risk is always a concern.

Still, for P&G, the tide may finally have turned in its favor.‹