P&G Excels, Ups 2013 View – Analyst Blog
Procter & Gamble Company (PG) reported second quarter fiscal 2013 adjusted earnings (excluding restructuring charges) of $1.22 per share, which surpassed the Consensus Estimate of 1.11 cents by almost 10%. Earnings also beat management guidance of $1.07 to $1.13 and improved 12% from the prior-year level driven by solid organic sales growth and improved productivity.
The consumer products giant’s net sales increased 2% to $22.18 billion in the quarter. The sales growth rate was also above management expectations of a range of negative 1% to a positive 1% due to improving global market share trends.
The company maintained its share in businesses comprising over 50% of sales in the quarter, up from 45% in the last quarter. P&G’s net sales also surpassed the Consensus Estimate of $21.89 billion.
Fiscal 2012 was a tough year for P&G and the company plans to implement some meaningful changes to re-accelerate its top and bottom-line growth in keeping with the peer companies. In addition, the company has implemented costs savings and productivity improvement initiatives in order to improve margins.
All these efforts are bearing fruit as evident from 2 back to back solid quarterly results. Following the solid first half results, P&G raised its sales and earnings outlook for fiscal 2013.
We were expecting a positive earnings beat this quarter from P&G as the stock had the impressive combination of Zacks Rank #2 (Buy) and +1.80% ESP (Expected Surprise Prediction). Moreover, this consumer giant has beaten earnings estimates in the past 4 straight quarters with an average earnings surprise of 4.96%.
Revenue and Margins
Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues were up 3% driven by balanced growth in volume and price. Organic revenues growth was at the higher end of management guidance due to lower-than-expected currency headwinds and decent volume growth.
Broad based price increases added 2% (in line with expectations) to revenue growth. Foreign exchange hurt revenues by 1%, half of management expectations of 2%. Volumes grew 2% in the quarter while geographic/product mix was a headwind of 1%. All business segments delivered organic sales growth rates of 2% or more.
Core gross margin increased 110 basis points to 51.2% as pricing gains and cost savings offset headwinds from geographic/product mix. Core selling, general and administrative expenses (SG&A) were flat (as a percentage of sales) at 30.2% in the quarter, as productivity gains were offset by higher pension costs. Core operating margin improved 110 basis points to 21.0% in the quarter due to gross margin expansion and cost savings.
Beauty: Beauty products improved 1% from the prior year (up 3% organically) to $5.4 billion in the reported quarter driven by innovation and better pricing. Price increases added 3% to revenue growth, whereas mix and volumes were flat. Foreign exchange had a negative impact of 1% on revenues.
Grooming: Grooming products declined 4% to $2.1 billion in the quarter due to currency headwinds and spin-off of the household appliances business. Organically, revenues increased 2% in the quarter. Price increases added 2% to revenue growth, whereas volumes reduced it by 2%. Mix was flat in the quarter while currency impact pulled down revenues by 3%.
Health Care: Healthcare products improved 3% to $3.27 billion driven by higher net sales in all the three segments – Oral Care, Feminine Care and Personal Health Care. Organically, revenues grew 4%. Price increases added 2% to the revenue growth, while mix declined 1%. Volumes grew 3%. Currency had a negative impact of 2% on sales.
Fabric Care and Home Care: The segment improved 3% to $7.2 billion driven by higher net sales in all the three segments- Fabric care, Home care and Batteries. Organically, revenues grew 3%. Price increases added 1% to the revenue growth, while mix was flat. Volumes grew 2%. Currency had a neutral impact on sales.
Baby Care and Family Care: The segment improved 4% to $4.3 billion driven by growth in both the segments – Family Care and Baby Care due to innovation. Organically, revenues grew 5% driven by price and volume growth and 2% and 6%, respectively. Mix pulled down revenues by 3% while currency hurt sales by 1%.
Fiscal 2013 Outlook Upped
Management increased its organic sales growth guidance to a range of 3% to 4% from prior expectations of 2% to 4%. Net revenues are expected to rise between 1% and 2% better than the prior guidance of growth remaining flat or increasing upto 1% from 2012 levels. Currency is expected to hurt revenues by 2% lower than the prior expectation of a headwind in the range of 2% to 3%.
The company also upped its previously provided core earnings guidance range of $3.80–$4.00 to $3.97–$4.07. The new guidance represents a growth rate of 3%–6% from 2012 levels, surpassing the prior expectation of a year-over-year movement of a negative 1% to a positive 4%. The better outlook emanated from the expectation of stronger productivity improvements, cost savings and higher share repurchases.
P&G hiked its share repurchase expectations from a range of $4 billion–$6 billion to a range of $5 billion–$6 billion.
P&G has laid out plans to improve results in developed markets while maintaining momentum in the developing nations. The company is focusing resources on the 40 largest and most profitable businesses, most of which are in developed markets. These businesses account for about 50% of sales and 70% of operating profit.
The company is also focusing on driving its 20 biggest innovations like Tide Pods, Always Radiance, Bounty Trap & Lock and Bounty Unstoppables in more markets in fiscal 2013. Moreover, the company is also concentrating on its 10 most important developing markets.
Third Quarter 2013 Outlook
In the third quarter of fiscal 2013, the company expects both net and organic revenues to range between 3% and 4%. Foreign exchange is expected to have a neutral impact on sales. Core earnings are expected to remain in the range of $0.91 to $0.97, representing a movement in the range of negative 3% to positive 3%.
Competitor, Kimberly-Clark Corporation (KMB) also announced its fourth quarter 2012 results today, beating the Zacks Consensus Estimate for both revenues and earnings.
Other Stocks to Consider
P&G carries a Rank #3 (Hold). We also see likely earnings beats coming from the following industry peers:
Colgate-Palmolive Co. (CL): Earnings ESP of +1.43% and Rank #2 (Buy).
The Clorox Company (CLX): Earnings ESP of +1.24% and Rank #3 (Hold).