Procter & Gamble (PG) shares closed just a $1.36 off their 52-week high Monday at $69.63. In mid-November, the consumer-goods company held an upbeat analyst meeting (aren't they all upbeat?) and hedge fund managers have been gobbling up shares since.
Wall Street turned positive on the shares after management promised to focus on its most profitable lines of business, its fastest growing markets and to slash expenses. Previously, the company announced plans to cut 10% of its non-manufacturing workforce, or 5,700 jobs, by the end of June, and keep cutting between 2% and 4% of its workforce through 2016. Management also planned to save $10 billion in cost of goods sold by 2016. It also announced that it now expects to buy back $4 billion to $6 billion of its shares. Previously it forecast $4 billion.
A few months ago, activist investor William Ackman announced that his Pershing Square fund had acquired a 1% stake in the stock. The announcement woke up management and prompted the changes.
Emerging markets make up 38% of P&G's revenue. Over the last 12 years, the developing markets collectively grew at a 12% annualized growth rate. Asia sales were up tenfold to $15 billion, and Latin America sales were up 8x to $8.3 billion. Central, Eastern Europe, Mideast and Africa grew from less than $1 billion in 1991 to $12 billion in 12 years.
By 2020, the developing markets are expected to add an additional 800 million people and account for 95% of the world population growth. That's no secret, and a lot of companies are going after those markets. While those markets are exciting, they are still just 38% of revenue. If you want to forecast P&G's revenue growth, all you have to do is forecast the U.S. economy. The developing markets are just too small relative to the developed markets to drive the stock.
After a disappointing fiscal 2012, when the company grew just 1.3%, fiscal 2013 is expected to be flat. Analysts say P&G can get back to revenue growth by 2014. Wall Street is modeling almost 4% growth in 2014 and just under 5% growth by 2016. If the company achieves that growth rate, P&G would likely report revenue of $91 billion and $4.72 per share in fiscal 2015, which works out to June of 2016.
The last time Procter & Gamble had healthy growth was in fiscal 2008, when the company produced 9% revenue growth. Since then, however, it's been a rocky road.
To own P&G shares you must be bullish on the developed world and its economic recovery. Otherwise, you're gambling with Procter & Gamble.