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Is P&G (PG) a Good Portfolio Addition with its Strong Margins?
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We issued an updated research report on The Procter & Gamble Company (PG - Free Report) on Aug 26, 2016.
On Aug 2, P&G announced better-than-expected fourth-quarter fiscal 2016 results with both earnings and sales beating the Zacks Consensus Estimate. Excluding Fx, earnings of 79 cents per share declined 8% as improved sales/volumes were offset by lower operating margins and higher taxes. Organic sales rose 2% driven by positive volumes – for the first time in years. However, operating profits were weak in the quarter due to higher marketing investments.
P&G has been struggling to grow sales over the past several quarters. Weak sales have been overshadowing margin improvement from pricing gains and cost cuts. Significant Fx headwinds, weak volumes, and slowing market growth – primarily in the emerging markets – have been denting sales. Brand divestures and management’s portfolio reshaping measures are also hindering P&G’s sales.
P&G operates in a challenging and volatile macro environment. Market growth rates are constantly decelerating, primarily due to slow growth in developing markets, which is hurting sales. Global market growth in P&G’s categories has decelerated from 4% a year ago to 3% at present, mainly due to slowdown in emerging markets.
However, the company is investing in its brands and products as well as re-designing the supply chain to boost productivity and organic growth.
P&G’s productivity improvements and aggressive cost-saving efforts have consistently improved margins. The company’s original five-year cost of goods savings target, per the restructuring plan announced in Feb 2012, was $6 billion. It exceeded the target and delivered $7.2 billion in savings. The company expects to generate up to an additional $10 billion of cost savings over the next five years (fiscal 2017–2021) in areas including supply chain and COGS, marketing and digitization as well as promotional spend effectiveness.
The productivity savings are being re-invested in R&D as well as product and packaging improvements, sales capacity, and in brand awareness to bolster top and bottom-line growth.
Moreover, under the portfolio strengthening and simplification plans announced in Aug 2014, P&G aims to streamline its business and focus more on its biggest brands, including Billion Dollar Brands like Tide, Pampers and Oral-B. Under the plan, that is nearing its completion, the company has eliminated almost 60% of the brands (roughly 105 brands) that were witnessing decline in sales and profits.
Following the closure of the beauty brands merger with Coty, Inc. (COTY - Free Report) in October this year, P&G will have a portfolio of about 65 consumer and shopper-preferred leading brands focusing on 10 categories organized under four industry-based sectors. Traditionally, these brands have grown faster and have been more profitable than others.
The divesture of the underperforming brands, though hurting near-term sales, will ultimately increase profitability in the long term.
Zacks Rank and Stocks to Consider
P&G carries a Zacks Rank #3 (Hold). Some better-ranked consumer staples stocks are The Clorox Company (CLX - Free Report) and Colgate-Palmolive Co. (CL - Free Report) , both with a Zacks Rank #2 (Buy).
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Is P&G (PG) a Good Portfolio Addition with its Strong Margins?
We issued an updated research report on The Procter & Gamble Company (PG - Free Report) on Aug 26, 2016.
On Aug 2, P&G announced better-than-expected fourth-quarter fiscal 2016 results with both earnings and sales beating the Zacks Consensus Estimate. Excluding Fx, earnings of 79 cents per share declined 8% as improved sales/volumes were offset by lower operating margins and higher taxes. Organic sales rose 2% driven by positive volumes – for the first time in years. However, operating profits were weak in the quarter due to higher marketing investments.
PROCTER & GAMBL Price and Consensus
PROCTER & GAMBL Price and Consensus | PROCTER & GAMBL Quote
P&G has been struggling to grow sales over the past several quarters. Weak sales have been overshadowing margin improvement from pricing gains and cost cuts. Significant Fx headwinds, weak volumes, and slowing market growth – primarily in the emerging markets – have been denting sales. Brand divestures and management’s portfolio reshaping measures are also hindering P&G’s sales.
P&G operates in a challenging and volatile macro environment. Market growth rates are constantly decelerating, primarily due to slow growth in developing markets, which is hurting sales. Global market growth in P&G’s categories has decelerated from 4% a year ago to 3% at present, mainly due to slowdown in emerging markets.
However, the company is investing in its brands and products as well as re-designing the supply chain to boost productivity and organic growth.
P&G’s productivity improvements and aggressive cost-saving efforts have consistently improved margins. The company’s original five-year cost of goods savings target, per the restructuring plan announced in Feb 2012, was $6 billion. It exceeded the target and delivered $7.2 billion in savings. The company expects to generate up to an additional $10 billion of cost savings over the next five years (fiscal 2017–2021) in areas including supply chain and COGS, marketing and digitization as well as promotional spend effectiveness.
The productivity savings are being re-invested in R&D as well as product and packaging improvements, sales capacity, and in brand awareness to bolster top and bottom-line growth.
Moreover, under the portfolio strengthening and simplification plans announced in Aug 2014, P&G aims to streamline its business and focus more on its biggest brands, including Billion Dollar Brands like Tide, Pampers and Oral-B. Under the plan, that is nearing its completion, the company has eliminated almost 60% of the brands (roughly 105 brands) that were witnessing decline in sales and profits.
Following the closure of the beauty brands merger with Coty, Inc. (COTY - Free Report) in October this year, P&G will have a portfolio of about 65 consumer and shopper-preferred leading brands focusing on 10 categories organized under four industry-based sectors. Traditionally, these brands have grown faster and have been more profitable than others.
The divesture of the underperforming brands, though hurting near-term sales, will ultimately increase profitability in the long term.
Zacks Rank and Stocks to Consider
P&G carries a Zacks Rank #3 (Hold). Some better-ranked consumer staples stocks are The Clorox Company (CLX - Free Report) and Colgate-Palmolive Co. (CL - Free Report) , both with a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>