We are maintaining our Neutral recommendation on Procter & Gamble Co. (PG).
Procter & Gamble reported an EPS of $1.02 per share for the first quarter of fiscal 2011, up 5.2% from 97 cents in the year-ago period, beating the Zacks Consensus Estimate of $1.00. Revenues were $20.1 billion, up 0.2% compared with the year-ago quarter’s $19.8 billion and missing the Zacks Consensus Estimate of $20.2 billion.
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 had a strong tradition of not only introducing blockbuster new products but also creating entire new categories.
The product categories for a synthetic laundry detergent, disposable diapers, and fabric softener did not exist until Procter & Gamble introduced Tide, Pampers and Downy. Other products of new categories include the surface cleaning category with Swiffer, the fat substitute market with Olean, and the fabric refresher spray category with Febreze.
The rapid pace of product innovations, supported by strong marketing, should facilitate the company to continue to deliver strong results. 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.
For example, the company’s launch of Gillette Fusion razor for both men and women has been well accepted by consumers. As a result, management is introducing more products under the Fusion brand, and is expanding the brand globally.
Management is committed to improve the company’s position in the faster growing developing markets, which currently represent only 30% of Procter & Gamble’s total sales. The developing markets, including Latin America, China, Asia, Eastern Europe, the Middle East and Africa, generate consumer product sales of approximately $70 billion, larger than the Western European or the North American markets. By the next decade, the developing market might equal the combined value of North America and Europe.
Procter & Gamble generates strong free cash flow annually. Operating cash flow for fiscal 2010 increased 8% year over year to $16.1 billion, providing an opportunity to invest in product innovations, acquisitions and brand development.
However, the company is facing severe competition in the Western European markets. Again, competitors like Kimberly-Clark Corporation (KMB) are countering several actions of Procter & Gamble, which can make the sustainability of the company difficult.
Procter & Gamble is also facing severe competition in both the blade and battery business from Energizer Holdings Inc. (ENR) which has stable markets in regions like North America, Western Europe and Japan.
Given the pros and cons we reiterate our Neutral rating on the stock. Procter & Gamble also holds a Zacks# 3 Rank, which translates into a short-term ‘Hold’ recommendation.
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