Earnings Preview: Procter & Gamble

We expect consumer giant, The Procter & Gamble Company ( PG - Analyst Report ) to beat expectations when it reports second quarter fiscal 2013 results on Jan 25 before the market opens.

Why a Likely Positive Surprise?

Our proven model shows that P&G is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP: Earnings ESP (Expected Surprise Prediction) (Read: Zacks Earnings ESP: A Better Method), the difference between the Most Accurate estimate of $1.13 and the Zacks Consensus Estimate of $1.11, stands at +1.80%.

Zacks #3 Rank (Neutral): P&G currently carries a Zacks Rank # 2 (Buy).

The combination of the stock’s Zacks Rank #2 (Buy) and +1.80% ESP make us confident of a positive earnings beat on Jan 25.

What is Driving the Better Than Expected Earnings?

The fourth quarter 2012 and first quarter 2013 was a turnaround period for this maker of Olay shampoo and Tide detergent. In the earlier quarters, slowdown in developed nations and commodity cost increases led to a series of disappointing earnings results and guidance cuts for P&G. P&G’s fourth quarter 2012 and first quarter 2013 results exceeded the performance in the past quarters.

P&G’s first quarter earnings were significantly better than the Zacks Consensus Estimate and improved 5% from the prior-year level driven by organic sales growth, lower commodity cost headwinds and improved productivity. Though net sales declined, they were at the favorable end of management’s expectations. The company also provided a bright outlook for the second quarter as well as the fiscal year.

For the second quarter of fiscal 2013, the company expects revenues to range between negative 1% to a positive 1%. Organic sales are expected to grow between 1% and 3%. Foreign exchange is expected to hurt revenue growth by 2% while pricing is expected to add 2% to sales growth. Core earnings are expected to remain in the range of $1.07 to $1.13, representing a movement in the range of negative 2% to positive 4%. In the quarter, the company expects market growth to slow down while its marketing plans to strengthen. The Zacks Consensus Estimate stands at $1.11, which is within the guidance range.

Estimates have mostly moved upwards after the announcement of the first-quarter results and the upbeat outlook for the upcoming quarter and fiscal year. The Zacks Consensus Estimate for fiscal 2013 grew 1.5% over the last 90 days to $3.97, reflecting year-over-year earnings growth of 3.07%. The estimate for fiscal 2014 went up 1.9% to $4.32 over the same timeframe, reflecting an earnings growth of 8.8%.

P&G’s strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess encourage us. Strategic initiatives like the June divesture of its snacks unit, Pringles, to Kellogg Company ( K - Analyst Report ) helps P&G focus more on beauty and personal care products.

Although fiscal 2012 turned out to be a tough year for P&G, the company has laid out plans to improve results in developed markets while maintaining momentum in the developing nations. Moreover, the company will increase focus on the most profitable business and on its biggest innovations, and further accelerate cost savings. These initiatives, if effectively executed, will help push up sales and profits in the upcoming quarters.

Other Stocks to Consider

P&G is not the only bullish firm this earnings season. We also see likely earnings beats coming from the following industry peers:

Colgate-Palmolive Co. ( CL - Analyst Report ) : Earnings ESP of +1.43% and Zacks Rank #2 (Buy).

The Clorox Company ( CLX - Analyst Report ) : Earnings ESP of +1.24% and Zacks Rank #3 (Hold).