Procter & Gamble (PG) aims at driving its long-term growth, mainly by accelerating new product innovation, expanding deeper into emerging markets, and continuing cost-cutting through process simplification and productivity enhancement.
A major growth driver for Procter & Gamble has been the continual expansion of its portfolio of brands, both through internal development and acquisition. Product innovation is strongly supported by management, and the company has had a strong tradition of not only introducing blockbuster new products but also creating entire new categories.
The product categories for synthetic laundry detergent, disposable diapers, and fabric softener did not exist until Procter & Gamble introduced Tide, Pampers and Downy, respectively.
The company has 24 power brands together generating over $1 billion in revenues, and a number of new brands are expected to reach that sales level in the future.
Procter & Gamble generates strong free cash flow annually. Operating cash flow for fiscal 2010 increased 8% year over year to $16.1 billion. The cash flow allows management the opportunity to invest in product innovations, acquisitions, and brand development.
However, the company faces severe competition in the Western European markets in both the blade and battery businesses. Although overall market share has increased for both batteries and blades, net revenues are declining. Management will have to intensify its marketing efforts to maintain market share andaccelerate top-line growth.
In addition, given competitors’ reactions to Procter & Gamble’s actions, the long-term sustainability of the high volume growth is questionable.
For example, Procter & Gamble’s lower cost structure and promotional spending on the Pampers training pants line, is countered by Kimberly-Clark (KMB) embarking on a capacity rationalization program for diapers in both North America and Europe. Kimberly-Clark is also retaliating with price promotions and lower pricing, coupled with the introduction of innovative products.
In conclusion, the earthquake and tsunami that hit Japan will have an impact on consumer spending and the overall economy of the country, which remains home to many luxury goods. However, P&G confirms that all its offices and plants are operational. 100% of employees have been accounted for and are safe. Further, the company has committed up to $1.2MM in support for earthquake relief including monetary and product donations.
We currently maintain a Neutral recommendation on the stock. P&G has a Zacks#3 implying a short term Hold’ recommendation.
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