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Procter & Gamble's Cost Saving Plans Bode Well, Fx Hurts

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On Feb 28, we issued an updated research report on The Procter & Gamble Company (PG - Free Report) -- a branded consumer products company which has presence in more than 180 countries.

Positives

Procter & Gamble shares gained around 13.2% in the last one year, outperforming the 11.9% gain of the Zacks categorized Soap & Cleaning Preparations industry as well as the 8.7% growth of the Zacks Consumer Staples sector over the said period.



The company recently released its second-quarter fiscal 2017 results wherein its earnings and revenues exceeded expectations by 1.9% and 0.3%, respectively, with broad-based organic sales growth and cost savings. Organic sales grew 2%. Procter & Gamble even raised the organic sales growth guidance to 2–3% (prior +2%).

Productivity improvement and aggressive cost saving have consistently improved margins. Core gross margin was up 70 basis points with the trend expected to continue in the upcoming quarters.

As part of the Feb 2012 restructuring plan, Procter & Gamble announced a target to reduce non-manufacturing or overhead enrollment by 10% over the next five years. Through Dec 31, 2016, the company reduced non-manufacturing enrollment by approximately 26% and expects to slash non-manufacturing or overhead roles by about 25–30% by the end of fiscal 2017.

The company expects to generate up to an additional $10 billion in cost savings over the next five years (fiscal 2017–2021) in areas including supply chain and cost of goods sold, marketing and digitization and promotional spend. The productivity savings are being re-invested in R&D as well as product and packaging improvements, sales capacity and in brand awareness to boost top and bottom-line growth.

Headwinds

However, foreign exchange is a major headwind for Procter & Gamble with around 60% of the company’s business generated outside North America. Foreign exchange hurt the company’s revenue growth by 6% in both fiscal 2015 and 2016. Though the impact moderated in the first half of fiscal 2017, it was still a 2% drag on the top line and 6% headwind to EPS. Going forward, with the strengthening of the dollar postelection in Nov 2016, foreign exchange headwinds will likely take a worse shape in the coming quarters.

Also, flat pricing/mix in the second quarter is reflective of increased competition and lack of transformational innovation. The company also lost global market share in three of its five reporting segments, with the other two remaining flat. The company has been struggling to boost market growth over the past few quarters.

Zacks Rank & Key Picks

Procter & Gamble carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Better-ranked stocks in the consumer staples sector include Unilever PLC (UL - Free Report) , Ingredion Incorporated (INGR - Free Report) , J&J Snack Foods Corp. (JJSF - Free Report) , all carrying a Zacks Rank #2 (Buy).

For full-year 2017, Unilever’s EPS is expected to grow 6.5%.

Ingredion also has a decent earnings surprise history, beating the Zacks Consensus Estimate in all of the last four quarters, the average positive earnings surprise being 10.36%.

J&J’s current year EPS is expected to improve 8%.

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