P&G Earnings Preview, What We’re Watching

Procter & Gamble (NYSE:PG) plans to release its Q3 FY2011 earnings on April 28^th. P&G competes with other leading players in personal care such as Unilever (NYSE:UL), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL), and markets will watch these consumer goods bellwethers for signs on spending trends and inflationary concerns. We value Procter & Gamble with a $75.25 Trefis price estimate of its stock, or roughly an 18% premium to its current market price.

P&G Focused on Market Share Growth

P&G embarked on its ambitious goal to acquire a billion additional consumers by 2014/15, which naturally drew its focus to the two most populous nations in the world China and India. To cater these high-growth but low-income level consumer market, P&G has had to launch low-priced and smaller-sized variants of its products, expand its distribution network to reach out to the consumers in the remote parts of country in spite of low connectivity and enter more product categories in these countries, all of which are likely to have considerably increased operating expenses.

We believe this focus on volume growth could weigh on to squeeze or at best maintain at current levels in the upcoming earnings release.

Pricing Could Hurt Margins

Much of P&G’s success in realizing its goal depends on pricing its products, which still carry a premium image in the emerging markets. Promotional pricing and a higher proportion of its sales coming from the lower-priced variants in these high-growth markets are expected to have a negative impact on the average price levels and lead to a lower gross margin mix.

Currency impact could further significantly dent the dollar value of sales. The swelling U.S. fiscal deficit putting downward pressures on the U.S. Dollar combined with the appreciating Chinese Yuan and Indian Rupee are expected to translate into a lower dollar value of sales.

Strategy Could Pay Off

P&G is essentially targeting high volumes to compensate for low margins and reduced average prices of its products. Accessing new consumers poses the biggest challenge in terms of the costs associated with marketing, advertising, product customization and distribution.

However, as these consumers gradually tier up to higher-priced brands within P&G’s portfolio, it unlocks a long-term growth potential. Hence, for these investments in emerging markets to put P&G on the promised, long-term growth trajectory, volume gains must start appearing in the near future.

You can see a detailed analysis of our $75.25 Trefis price estimate of Procter & Gamble’s stock here.