P&G Must Overcome Macroeconomic Headwinds in Order to Drive Growth

US conglomerate Procter & Gamble (NYSE:PG) has recently been going through a slowdown in revenue and volume growth. As a result its stock price has remained relatively stagnant, testing the patience of its long-term investors. The consumer products giant operates in a number of business segments and possesses a vast portfolio of brands, such as Gillette and Tide. Due to its global reach and diverse nature, the company’s financial performance is heavily linked to a number of macroeconomic factors.

Commodity Price Volatility has Forced Price Increases

The company’s commodity related costs have increased by over $3.6 billion in recent years, which is about 25% of its core operating profits. P&G has opted to tackle these cost increases by increasing prices, rather than letting it affect its bottom line.

Consumer staples have low price elasticity, with customers generally very open to switching if the price of their preferred brand increases beyond affordable levels. As a result, the company has seen declining volumes and market share in a number of its operating segments, particularly in beauty and household care.

Revenue Growth in Developed Countries Hampered by Slowdown

The recession of 2008 and the ongoing Euro-zone crisis have led to the possibility of protracted economic growth in the developed countries. The majority of P&G’s revenues are from these countries, but there has been a shift in trend towards developing countries in recent years. In FY 2012, North America (US and Canada) and Western Europe together made up 58% of total revenues, compared to 62% in FY 2010. This trend may increase the company’s exposure to risks specific to developing markets in the future.

Apart from a few exceptions, almost all of P&G’s products have seen declining volumes in the developed regions in recent years. This is due to the combined effects of reduced consumer spending and increased product prices.

Large Component of Revenues Linked to Currency Price Fluctuations

Net sales in the United States account for only 35% of the company’s total sales. A major portion of the company’s total revenues are thus linked to currency movements against the dollar. A strengthening dollar would reduce revenues.

Furthermore, the company maintains cash reserves in local currencies of a number of countries in which it has sizeable businesses, such as China, India and Venezuela. Again, a strengthening dollar would cause these reserves to depreciate.

We currently have a Trefis price estimate of $69 for P&G, which is about 3% above the market price.

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