Procter & Gamble (NYSE:PG) recently lowered its guidance for sales and earnings growth for FY 2014 (fiscal year ends in June) due to unfavorable exchange rate movements in many developing economies and policy changes by the Venezuelan government. The world’s leading consumer goods company expects currency translation effects to reduce all-in sales (accounting for the impact of currency movements) by 2%–3%. However, it maintained its guidance of 3%–4% growth for organic sales (excludes the impact of foreign currency movements). Consequently, all-in sales are now expected to register up to 2% growth compared to the initial forecast of 1%–2% growth. 
P&G expects the currency movement to also negatively impact core earnings per share growth. Core earnings include the effect of foreign exchange movements but exclude the impact of certain one-time charges. The company forecasts core earnings per share to grow in the range of 3%–5%, lower than its initial guidance of 5%–7% growth. 
Lately, many developing countries such as Brazil, Russia, South Africa, Argentina and Turkey have witnessed their currencies depreciate relative to the US dollar. This has negatively weighed on the income statements and balance sheets of many American firms that have significant operations outside of the U.S. The currency devaluation has also created inflationary pressures on many markets, because of which buyers have reduced their consumption.
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Towards the end of 2013, Unilever’s CEO, Paul Polman, announced at the World Wildlife Fund Duke of Edinburgh Conservation Awards that this slowdown in emerging economies will stay for a long period.  P&G derives about 40% of its revenues from emerging markets, lower than its close rivals Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). However, the company is now looking to enhance its presence in these markets as they continue to grow faster than developed economies. We believe that a prolonged slowdown could hamper P&G’s expansion plans, and consequently its growth trajectory.
Our price estimate of $70 for Procter & Gamble’s stock marks our valuation at a discount of about 10% to the current market price.Notes:
- P&G Updates Earnings Projections to Reflect Significant Currency Exchange Rate Movements, P&G Investor Relations Website, February 11, 2014 [↩] [↩]
- Unilever CEO Says Emerging Market Slowdown to Last for Years, Bloomberg, December 2013 [↩]