Procter & Gamble (NYSE:PG) will announce its first quarter earnings for FY 2013 on October 25. The consumer goods giant had mixed results in the previous quarter with success in implementing cost cuts being offset by declines in market share and margins, leading to an overall decline in revenues. Procter & Gamble competes with other global consumer goods conglomerates such as Unilever (NYSE:UL), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL).
We expect the ongoing cost cutting program to support price cuts, which will in turn enable market share gains but may hinder margins in the short-medium term. Another key driver of performance going forward is the growing influence of activist investor Bill Ackman, who bought a 1% stake in the company earlier this year.
Value gains expected from cost cutting program
P&G has increased overall pricing by over $3.5 billion over the past few quarters in order to offset similar increases in commodity costs. The problem is, however, that competitors have not taken pricing, and this has led to declining market share and volumes for a number of business segments. About $400 million of these price increases were rolled back through price cuts and promotions, but this did not lead to a market share gains in the previous quarter.
Earlier this year, P&G outlined a restructuring plan to reduce cumulative costs by $10 billion by 2016. This involves reducing overheads by $3 billion, cost of goods sold by $6 billion and marketing expenses by $1 billion.
The company incurred over $700 million in restructuring expenses during the previous fiscal year and has estimated total expenses of $3.5 billion by the end of fiscal 2015. Almost half of this amount is expected to be incurred by the end of fiscal 2013.
If these cost savings are realized as planned there will obviously be substantial value gains either through margin expansion or market share gains from subsequent price cuts. However, there is considerable doubt on whether or not these ambitious plans are executable.
The company has lost market share in a number of divisions such as Beauty, primarily to competitors such as Unilever but also to local players. Price cuts could enable it to regain some of the lost market share going forward.
Increased pressure from investor Bill Ackman
Pershing Square Capital Management, a hedge fund run by Bill Ackman, bought $2 billion worth of P&G’s stock earlier this year (a stake of around 1%). Mr. Ackman has a reputation of using his standing as a major shareholder to influence changes in company strategy and management. For example, he managed to have the CEO of Canadian Pacific Railway Ltd. replaced.
Bill Ackman’s purchase in P&G has thus put the management, especially CEO Robert MacDonald, under increased pressure. We believe that this could lead to positive changes in the company’s business strategy and cost structure, enabling the company to regain a substantial portion of the margins it lost after 2009.
For instance, the Fabric Care & Home Care division had EBITDA margins of around 26% in 2009, and this contracted to around 20% in 2011. We currently forecast EBITDA margins to gradually reach near 21% by the end of our forecast period.
We currently have a Trefis price estimate of $69 for Procter & Gamble, which is in line with the market price.