P&G Earnings Preview: What We’re Watching This Friday

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PG: Procter & Gamble logo
PG
Procter & Gamble

Procter & Gamble (NYSE:PG) will announce its second quarter results Friday. We expect the company’s earnings will continue to be slightly depressed owing to higher input commodity and energy costs despite pricing efforts. With slow market volume growth and higher pricing trends, we will watch out for P&G’s volume growth and market share performance. P&G competes with 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

2011 Story of Slow Market Growth, Input Inflation and Higher Pricing Likely to Continue

Due to higher input commodity costs throughout 2011, P&G continued to increase prices every quarter to offset the pressure on its gross margins. This however led to some market share loss in North America and Western Europe last year. Last quarter (Q1 2012), the consumer goods giant reported 2% volume growth, slightly better than the slowed overall market volume performance and maintained market share in 4 of its 6 reporting segments, which contribute 60% of its revenues, but suffered a decline elsewhere.

Higher costs (340 bps) and adverse mix and foreign exchange (160 bps), resulted in a net 240 bps decline in gross margin, offset by higher pricing and cost savings (260 bps). The trend is likely to continue and despite pricing and cost saving efforts and some cost moderation, gross margin could still contract in fiscal 2012.

For fiscal 2012, P&G expects organic sales growth in the range of 3%-6%, provided global markets grow at 3%-4%. We will look for updates on the overall market growth and consumer sentiment in developed and emerging markets in the upcoming results. In its previous earnings call, P&G said it expects developed markets to grow slowly (~1%-2%), compared to 6%-8% growth in developing markets in 2012. Volume growth could be depressed by slowing growth in developed markets and rising prices if input inflation continues.

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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