[The figure most investors scrutinize for PG is the “organic growth,” which strips out the effects of FX and acquisitions; it was +2% year-over-year, better than the company’s prior guidance and the analysts’ consensus. PG’s fiscal year ends Jun 30; the quarter reported today was FY1Q10.]
CHICAGO, Oct 29 (Reuters) - Procter & Gamble Co (PG) posted a quarterly profit well ahead of analysts' forecasts and said it has modestly higher expectations for growth in the industry even as consumers continue to remain cautious.
P&G's pantry of products have been pressured for months, as shoppers try cheaper brands than Pampers and Tide, and eschew indulgences such as Hugo Boss cologne and SK-II face cream.
The world's largest household products maker earned $3.31 billion, or $1.06 per share, in the fiscal first quarter that ended on Sept. 30, compared with a profit of $3.35 billion, or $1.03 per share, a year earlier. Analysts, on average, expected P&G to earn 99 cents per share, according to Thomson Reuters I/B/E/S. Net sales fell 6 percent to $19.8 billion, with declines in every category ranging from beauty to snacks and pet care.
Organic sales, which exclude the impact of currency fluctuations, acquisitions and divestitures, rose 2 percent. P&G had predicted such sales would be flat to down 3 percent.‹
[KMB is a play on The Global Demographic Tailwind for essentially the same reasons as PG: the emerging middle class in less-affluent countries will increase the demand for such products as Huggies and Kleenex, converting them from luxuries into everyday items. KMB is about one-sixth PG’s size in terms of enterprise value (market cap+net debt), is somewhat more leveraged operationally and financially, and trades at a slightly lower P/E ratio; however, in many ways the two companies provide similar attractions for buy-and-hold investors.]
Investing in large consumer staples like Procter & Gamble is an easy way to get global diversification. Back in June 2008, the Forbes Growth Investor's quantitative model said it was time buy Colgate-Palmolive, which outperformed the S&P 500 by over 30 percentage points during the period. That same model is now telling us to buy Kimberly-Clark.
Kimberly-Clark is a global supplier of branded health and hygiene products. An estimated 1.3 billion people in over 150 countries use its products daily. In 2008, 53% of sales were generated in North America, 18% in Europe, and 29% in Asia, Latin America and other countries.
The company reports four business segments. Personal care products accounted for 44% of sales during the first nine months of this year. This segment makes diapers, training pants, swim pants, baby wipes, feminine care products and incontinence care products. Popular brands include Huggies, Pull-Ups, Little Swimmers, GoodNites, Kotex, Lightdays, Depend and Poise.
The consumer tissue segment produced 34% of first nine-month sales. It makes facial and bathroom tissues, paper towels, napkins and other household products. Brands include Kleenex, Scott, Cottonelle, Viva, Andrex, Scottex, Hakle and Page.
Another 15% of sales during the first nine months of 2009 came from the division that supplies facial and bathroom tissues, paper towels, napkins, wipes and other products to commercial customers.
Finally, the health care segment produced 7% of sales. It supplies health care customers with disposable products such as gowns, drapes, wraps, face masks, gloves and respiratory tubes.
Management began a series of comprehensive cost-cutting initiatives in 2005 that continue to yield incremental savings. These actions have helped the company better navigate volatility in commodity prices and the recession. Despite these efforts, cost inflation in 2008 caused the operating profit margin to decline 120 basis points to 13.1%. Things improved dramatically this year. The operating profit margin is up 190 basis points to 14.9% for the first nine months of 2009.
Third-quarter net sales fell 1.7% year-over-year to $4.91 billion due largely to unfavorable foreign exchange.[Foreign exchange will provide a tailwind for year-over-year comparisons beginning in 4Q09.]On an organic basis, sales grew 3% on higher prices and flat volume.[This isn’t a bad performance during a global recession.]
The health care segment was the only one to show an increase in sales. They surged 15.8% to $351 million as swine flu fears increased demand for face masks[as was the case for MMM’s heathcare division]. The consumer tissue segment posted the biggest decline as sales fell 5% to $1.63 billion.
Lower commodity prices and cost savings helped boost the gross profit margin by 588 basis points to 35.15%. The operating profit margin expanded 552 basis points to 17.73%. Net income surged 37% from a year ago to $582 million or $1.40 per share.
Management raised sales guidance for the full year. It now expects a 2% decline in net sales, an improvement over the 4%-6% decline previously forecast.[This guidance included the effects of exchange rates, which will be a net negative for 2009 as a whole vs 2008.] Management is also calling for earnings of $4.50-4.60 per share, up from its earlier guidance of $4.10-4.25 per share.
Investment concerns include competitive pressures and trading down to cheaper brands by consumers still struggling with the economic recession. Rising prices for pulp and oil resins, KMB's largest inputs, also pose a risk[but see below re KMB’s “natural hedge” on dollar-denominated commodity prices].
To some extent, the unfavorable impact of higher dollar-based commodity prices is being offset by the deteriorating U.S. dollar, which makes KMB's products more competitive in foreign markets. In fact, foreign exchange could provide a significant tailwind for most of 2010.
Longer-term prospects are also favorable as KMB continues to expand in developing and emerging markets where standards of living are rapidly rising[the premise of this message board]. KMB stands to gain in developed markets with innovative products. For example, demographics strongly favor its incontinence care product line.
Finally, we like the 3.7% dividend yield on this stock.‹
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