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The Procter & Gamble Company (PG - Analyst Report) reported mixed fiscal third-quarter 2014 results beating the Zacks Consensus Estimate for earnings but missing the same for sales. A significantly lower tax rate played a major role in driving the earnings beat. The consumer products giant also maintained its financial outlook for fiscal 2014.

The company’s third-quarter fiscal 2014 adjusted earnings (excluding restructuring cost and balance sheet revaluation charges due to Venezuelan Bolivar swings ) of $1.04 per share beat the Zacks Consensus Estimate of $1.02 by 2%. Moreover, earnings increased 5% in the quarter despite currency headwinds of 12 cents, higher than 11 cents reported last quarter.

Excluding currency headwinds, earnings increased 17% in the quarter as healthy organic sales growth, improved operating margins and lower taxes boosted earnings in the quarter.

P&G’s net sales were flat at $20.56 billion due to a 3% headwind from currency. The top line narrowly missed the Zacks Consensus Estimate of $20.67 billion. With around 60% of the company’s business generated outside North America, a strong dollar lowered the value of international sales.

Revenues and Margins

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 3% due to growth in both volume and pricing.

Organic volumes grew 3% in the quarter, same as in the second quarter. Pricing increased sales by 1%, same as in the previous quarter. Foreign exchange hurt revenues by 3%. Geographic/product mix declined 1% in the quarter due to higher growth in lower margin developing countries.

All the segments did well in the quarter. While the Beauty and Fabric Care/Home Care segments picked up from the last quarter, the HealthCare businesses slowed down due to product recalls in Pet Care and lower demand in Personal Health Care.

Despite manufacturing savings, volume leverage and pricing gains, core gross margin declined 110 basis points (bps) to 48.9% due to unfavorable geographic/product mix, currency headwinds and higher commodity costs.

Core selling, general and administrative expenses (SG&A) improved 130 bps (as a percentage of sales) to 29.9% due to productivity/overhead savings and marketing spending efficiency. Core operating margin improved 20 bps to 19.0% as gains from lower SG&A ratio made up for the weak gross margins. However, we note that both gross and operating margins declined sequentially in the third quarter.

The effective tax rate stood at 19.7%, a significant 250 bps lower than 22.2% in the year-ago quarter. Lower tax rate boosted earnings per share by 3 cents in the quarter.

Fiscal 2014 Outlook Retained

Core earnings per share are still expected to grow in the range of 3–5% in fiscal 2014. We would like to remind investors that P&G lowered its fiscal 2014 core earnings forecast in Feb 2014 from a range of 5–7% to 3–5% to reflect emerging-market currency devaluations.

Net revenue growth is expected to approximately 1%, slightly better than previous expectations of a range of 0% to 2%. Currency is expected to hurt revenues by 2–3%, However, organic sales are still expected to increase between 3% and 4% in fiscal 2014.

Other Stocks to Consider

P&G carries a Zacks Rank #3 (Hold). Some better-ranked consumer staples companies include Coca-Cola Enterprises Inc. (CCE - Analyst Report), PepsiCo, Inc. (PEP - Analyst Report), and Mondelez International, Inc. (MDLZ - Analyst Report). All the three stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on PG
Read the Full Research Report on CCE
Read the Full Research Report on PEP
Read the Full Research Report on MDLZ


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