Overseas challenges are sometimes too much for a U.S.-based multinational to overcome, even one that’s well-managed with a portfolio of iconic products that consumers love. Case in point: The Procter & Gamble Co (NYSE:PG), which is getting clobbered by currency devaluations and slowing emerging market growth.
P&G is a consumer brands powerhouse, with a stable of trusted products such as Tide, Bounty, Charmin, Dawn, Cheer, Olay, Gillette, and Oral-B that are ubiquitous parts of daily life for millions of people around the globe.
As a cyclical consumer goods play, investors might think that PG stock is a good bet as economic recovery strengthens.
Think again.
As with the rest of its peers in the consumer goods sector, PG stock has struggled with currency headwinds, downward pressure on retail prices, rising commodity costs and lagging growth in emerging markets. Until P&G’s operating environment turns around, this is one consumer goods play that you should leave on the shelf.
P&G’s second-quarter fiscal 2015 operating results were released today before the opening bell, showing a year-over-year drop in earnings per share (EPS) of 31%, which only proves our point. P&G reported second-quarter earnings of nearly $2.4 billion, or EPS of 82 cents, compared with earnings of more than $3.4 billion, or EPS of $1.18 in the same quarter a year ago. Revenue came in at $20.2 billion, a year-over-year drop of more than 4%.
Excluding one-time items, P&G’s core EPS was $1.06, a year-over-year drop of 8% and missing Wall Street’s consensus estimate of core EPS of $1.14 on revenue of $20.7 billion.
Management said that it expects unfavorable foreign exchange rates to dampen fiscal full year 2015 earnings by 12%.
To P&G’s credit, it has been slimming down by sloughing off underperforming divisions and brands in an attempt to be a leaner company. The company recently sold more than 100 brands and is focusing its marketing and distribution resources on about 80 core, bestselling brands that make up roughly 90% of sales.
Notably, the company dumped the Duracell brand and jettisoned the battery business.
However, P&G generates roughly two-thirds of its revenue from overseas, which means currency devaluations in other countries exert a particularly harsh effect on the company’s pricing power and earnings.
Major markets such as Venezuela and Turkey have devalued their currencies to cope with respective economic woes that won’t abate anytime soon. What’s worse, as of this writing the value of the euro hovered at $1.13, below the rate of $1.17 at which it was introduced in January 1999.
Overseas Concerns Haunt PG Stock
The twin specters of deflation and recession throughout the eurozone are proving a major problem for the company, as consumers tighten their belts amid uncertain job and economic conditions. That may ease somewhat in 2015, as the European Central Bank steps up its purchases of bonds to provide monetary stimulus. But the recent election of leftists in Greece has the entire continent jittery and European resurgence is an iffy proposition right now.
Meanwhile, markets that once served as bulwarks of growth for P&G, such as Russia and the Middle East, are riven with political turmoil and are a drag on overseas sales.
Procter & Gamble is a consumer brands behemoth with valuable products but until it gets a handle on these global hassles, PG stock should underperform in 2015, despite healthy growth in North America.
Better investments are found elsewhere.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
