Emerging Markets Will Fuel Procter & Gamble’s Earnings Growth

Procter & Gamble (NYSE:PG) will release its third quarter earnings for fiscal 2013 on April 24. After a satisfactory bounce-back in sales last quarter, we are keen to see if the company can maintain its growth momentum amid an adverse economic environment.

Sales for the October-December quarter stood at $22.2 billion, organic growth of 3% over the previous year same period. This growth largely came on higher volume and better product pricing. A focus on emerging markets helped the company increase its sales from these regions by 7%. Brazil and India led the growth in emerging countries and clocked a 20% increase during the same period. See a detailed analysis about Procter and Gamble’s October-December results here.

For the January-March 2013 quarter, we estimate organic sales growth to be largely in line with the management’s estimate of 3%, taking total sales to about $22.8 billion. ^[1] The Baby Care and Health Care divisions will be the main focus areas. P&G has been looking to improve diaper sales in the developing markets. With a booming population of infants and rising income levels, emerging markets look like the main driver for future growth in baby care products. We will also watch the impact of an expanded product portfolio under its oral care and OTC medication divisions in geographies like Latin America and Asia. ^[1]

Productivity And Cost Savings To Continue

In 2012, Procter & Gamble embarked on an ambitious mission to save $10 billion in costs by undertaking a restructuring program across the company. It plans to complete this program by the end of fiscal 2016. Under this program, the company will save $6 billion in costs of goods sold while another $1 billion and $3 billion of savings will come from marketing efficiencies and non-manufacturing overhead, respectively. P&G is also planning to reduce its working capital requirements by as much as $2 billion by increasing the number of days it takes to pay its suppliers to 75 days up from the current 60 days. ^[2]

We estimate the company will spend about $500 million under its restructuring program during this quarter. The firm has been making impressive progress, and we estimate the program to add about 4% to its operating profit this quarter. ^[1]

Innovation To Drive Growth

The constant innovation of existing products and developing new products have helped P&G win over consumers globally and across price tiers and preferences. The company spent $4 billion in 2012 on capital expenditure, primarily to support capacity expansion, innovation and cost savings. It is also launching an all new range of scented soap bars under its Old Spice brand targeting men and seeks to increase the contribution of this brand to the top line from the current $564 million, which is less than 1% of its $83 billion revenues. ^[3] P&G has created new categories and new brands like Tide PODS, Swiffer and Crest Whitestrips to expand its reach among consumers. We expect these categories to lend support to the revenue growth for this quarter.

We will revise our $70 price estimate for P&G based on the Q3 earnings results.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Q3 2013 Guidance [↩] [↩] [↩]
2. P&G, Big Companies Pinch Suppliers on Payments, WSJ, April 16, 2013 [↩]
3. Old Spice Expands into Bar Soap, Associated Press, April 8, 2013 [↩]