Procter & Gamble's Report Shines

 | Jan 29, 2013 | 10:00 AM EST
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We recommended Procter & Gamble (PG) a number of times last year, and more recently at the start of this January, as a solid, dividend-paying stock that also had good upside potential. Part of our buy thesis was based on a belief that Procter's disappointing results and management missteps in 2011 and 2012 would force its board and management to do better in operating the company for shareholders.

Procter & Gamble just reported better-than-expected revenue of $22.1 billion, compared with an expected $21.9 billion. Earnings per share had an even bigger beat, coming in at $1.22, compared with $1.11 consensus expectation.

Importantly, fiscal 2013 annual earnings guidance was raised to a range of $3.97 to $4.07 per share, compared with the previous $3.80 to $4.00 guidance. This stronger guidance was driven by market-share gains in new product launches, in particular the newly marketed Tide Pod detergents. Strong emerging-market growth of 13% also contributed to the better results, particularly helped by 20% growth in both China and Brazil.

Management also aided the earnings recovery with increased marketing spending, aggressive cost-reduction actions and favorable share-buyback activities. In particular, Procter's multi-year $10 billion cost-reduction programs are beginning to add to margins and earnings growth. Many investors were hesitant to believe that management would actually achieve such a high level of cost savings. But thanks to shareholder pressure, in particular Bill Ackman's pointed suggestions, Procter's management team aggressively implemented the expense reductions.     

After last week's positive earnings surprise and outlook, investors are beginning to regain confidence in the company's management team and franchise. We still maintain a strong conviction level with Procter & Gamble shares. Although the shares aren't as cheap as they were back in June, the long-term outlook is still intact for conservative, dividend-oriented investors who also want modest upside appreciation potential.

Procter & Gamble is still the global leader in consumer products, controlling such iconic brands as Ivory, Gillette, Tide and Pampers. The firm has a long history of above-market EPS growth and dividend payouts -- its current dividend yields 3.1%. The company should continue to fully participate in the rapid growth of the emerging markets of Asia, Latin America, Africa, Eastern Europe and the Middle East.

At a recent price of $73.77, Procter & Gamble trades at about 18x 2013's EPS estimate of $4.05, which is in line with its historical range of 17x to 19x. Management continues to be committed to improving the earnings and franchise. The $10 billion in cost-cutting programs are still in their early stages of the company's five-year implementation strategy, and as these programs continue to kick in, one could see further improvements and gains from existing levels.  

We still like Procter on the basis of its fundamentals over the intermediate and longer terms, and we continue to recommend the shares. Bottom line, we believe its recent momentum and better-than-expected successes should continue, driving the stock higher.

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