P&G Fights Cost Pressures with Emerging Markets Growth

Procter & Gamble (NYSE:PG) recently announced results that showed commodity costs weighing on gross margins that were offset by steady eddy volume and pricing growth. As a result, it maintained or improved market share in the majority of its product categories, fending off other leading players in the personal care segment such as Unilever (NYSE:UL), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL).

See our complete analysis for Procter & Gamble’s stock.

Developing markets carry the load

Last quarter, P&G sales grew 9%, achieving an organic sales growth of 4% with a 2% organic volume growth, at the higher end of its previously announced guidance range. Pricing contributed 4% to organic sales growth and was up in all 6 reporting segments. Having volume growth slightly better than the slowed overall market volume growth, it held or grew share in 4 of its 6 reporting segments, that contribute 60% of its revenues, but suffered a decline elsewhere.

For fiscal year 2012, P&G continues to expect organic sales growth in the range of 3-6%, assuming 3-4% global market value growth. With growing macroeconomic pessimism, volume growth is likely to be pressured by slow developed market growth and price increases. Developed markets are expected to provide only 1-2% value growth and growth will mostly come from developing markets which are expected to deliver 6-8% growth.

Gross margins going down with higher commodity costs

This quarter, P&G faced an additional $700 million in higher commodity costs resulting in a 240 bps decline in gross margin. Even though pricing, cost savings and fixed cost leverage improved gross margin by about 260 bps, these benefits were more than offset by a 340 bps negative impact from higher commodity and energy costs and 160 bps negative impact from the combination of mix and foreign exchange. Despite all pricing and cost saving efforts, we still expect to see gross margin contraction for the year.

In fiscal 2011, P&G faced $1.8 billion in higher input costs and despite 1% pricing, ended the year with a net negative profit impact of about $1 billion before tax. This year, P&G expects an additional $1.8 billion in higher input costs, but with a higher pricing by over 3%+, P&G expects a net positive impact of about $1 billion before tax.

We value Procter & Gamble with a $71.56 Trefis price estimate of its stock, at almost a 10% premium to its current market price.

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