The Rising Influence of Rising Affluence

[DewDiligence]

Angry Analysts Scorch P&G CEO

[Without a doubt, PG had a bad quarter; the stock is down 5% since the earnings announcement before the open last Friday, which is a big move for such a stable stock. Among the reasons for the poor quarter were large cost increases for raw materials that PG does not expect to continue into 2013 and a currency devaluation in Venezuela (see in-line comments below). Just plain bad execution was also a factor in the quarter (which is what irked the analysts so much), but I figure that PG’s top management is not stupid and hence the poor execution will benefit in due course from a “regression to the mean” effect.

FY2Q12 YoY sales growth was an anemic 4% (4% from pricing, 1% from volume, and -1% form mix) and “organic” YoY sales growth (excluding acquisitions, divestitures, and currency) was also 4%. PG lowered non-GAAP FY2012 EPS guidance (excluding the Pringles sale and other one-off items) to $3.83-3.88, down from old guidance of 3.93-4.03, which was given prior to Venezuela devaluation. The current share price thus 16-17x the (arguably depressed) FY2012 EPS, which may not be a screaming buy but is not excessive, IMO.

Despite the weak results, PG’s prospects don’t seem all that bleak to me, and I’m content to receive the juicy $2.25 dividend (#msg-74380856) while waiting for business to improve. What’s undeniable is that PG is a strong play on The Global Demographic Tailwind in many categories. Emerging markets will comprise 37% of PG’s dollar sales (and 45% of unit sales) by end of FY2012 and this figure is apt to reach 50% in a few years. PG is certainly not going to double your money in a short time, but it’s a legitimate core TGDT holding that could easily double your money (on a total-return basis including dividends) during the next 5 years or so.

If anyone disagrees, please post!]

http://online.wsj.com/article/SB10001424052702304811304577369553120154614.html

›April 28, 2012
By EMILY GLAZER

"Good quarter, guys" wasn't the message Procter & Gamble Co. Chief Executive Robert McDonald got when he dialed in to his company's earnings conference call Friday.

Instead, he confronted an unusually angry barrage from Wall Street analysts over the latest in a string of weak results from the world's largest consumer products company.

The analysts showed little restraint in venting their frustration after P&G lowered its profit outlook and said it would roll back recent attempts to raise prices in key markets.

P&G's sales rose 3%, which looked skimpy against an 8.5% rise for rival Unilever PLC and a 6.5% increase for Colgate-Palmolive Co.

P&G blamed weak developed markets and competitors' failure to follow its lead on price hikes. But some analysts blamed Mr. McDonald.

"It strikes me that from an execution perspective, P&G isn't delivering," said Citigroup analyst Wendy Nicholson.

"There's so many excuses: Not our fault, competition didn't follow the pricing; not our fault, Venezuela changed; not our fault, the developed consumer isn't robust," she continued. "And I just say to myself, God, where is the mea culpa?" [Actually, the new price controls in Venezuela—effectively a devaluation—cost PG about $0.05 of EPS during the quarter. Other consumer-products companies operating in Venezuela there who have not yet taken a hit to earnings will presumably have to do so later.]

Tim Conder, a Wells Fargo analyst, and Ali Dibadj, a Sanford C. Bernstein analyst, echoed those sentiments, pointedly asking Mr. McDonald why P&G continued to stumble when its rivals managed to steer around the same obstacles.

"How much patience," Mr. Dibadj asked, "does the board have?"

Answering Ms. Nicholson, Mr. McDonald said: "Let me be clear. It is my fault. I am the CEO of the company. I do take responsibility."

The tone of the comments was remarkable by the often soft-shoe standards of Wall Street stock research. [No doubt on this point.] Analysts are often accused of being overly forgiving with CEOs, a reputation they feed by regularly uttering words of congratulations on conference calls [this unseemly behavior applies to US analysts, specifically—see #msg-74483547].

Good relations are important to preserve access to company executives, so criticisms, when they do come up, tend to be heavily couched. But frustration is growing with P&G's performance. The company has failed to squeeze the expected results out of big areas like its beauty and grooming business, and has been slow to cut costs even as consumer demand weakened in the wake of the recession.

Those failings are evident in P&G's stock, which has changed little over the past two years. Meanwhile, Unilever's is up 13% and Colgate's is up 17%. P&G shares fell 3.6% to $64.46 Friday, their biggest drop in 2½ years. The decline came after the maker of Bounty paper towels, Pampers diapers and other household staples reported a 16% decline in earnings amid high commodity costs and charges related to cost-cutting plans.

The consumer products giant cut prices aggressively in recent years in a worldwide battle for market share. More recently, it has tried to roll back some of those cuts as input prices have risen. Those moves cut into P&G's market share, which fell in 55% of the categories and countries where it competes.

As a result, P&G said it would again cut prices for powdered laundry detergent in the U.S., as well as on oral care, automatic dishwashing detergent, and blades and razors in North America.

P&G is also lowering prices on its laundry detergent in the U.K. and Mexico. The company says it implemented $3.5 billion in price increases this year and plans to roll them back by $200 million.

P&G announced a cost-cutting program in February that involves eliminating more than 4,000 jobs, streamlining its massive marketing budget and chopping other expenses by fiscal 2016.

The company plans to steer savings from the cuts into expanding its position in emerging markets.

For the quarter ended March 31, P&G reported a profit of $2.41 billion, down from $2.87 billion a year earlier. For the full fiscal year, which ends in June, the company said it expects earnings of $3.82 to $3.88 a share. It had previously forecast earnings of $3.93 to $4.03 a share.

Price controls in Venezuela, which required price cuts of up to 25% on certain P&G products, are also weighing on results for the company.‹