There was good news and bad news out of venerable Procter & Gamble (NYSE:PG) on Friday. The company beat revenue and earnings expectations and has plenty of room for expansion, but rising commodity prices could create pricing pressure on its products.
Analysts have prognosticated revenue of $20.63 billion and 82 cents per share in net income. P&G dropped $20.86 billion of revenue onto the reporting table, netting out 84 cents per share. One might expect that a stalwart like P&G might only be growing earnings in the high single-digits after so many years, but this represented a whopping 18% increase year over year.
Numbers this solid can only enhance P&G as a port in the current market storm (its stock has barely moved since Friday’s report while the rest of the market has tanked). P&G is a global juggernaut — the producer of a multitude of consumer staples that will be purchased in good times and bad — pays a solid 3.5% dividend (with little chance of it being cut) and has $9.47 billion in free cash flow over the trailing 12 months (thus the reason for the safe dividend).
Oh, and Warren Buffett owns 2.75% of the company.
However, there are a few concerns to be aware of before just jumping in to buy the stock. The company said rising commodity prices are causing their costs to rise. This puts the company in a tricky position because it has little room to maneuver regarding their pricing points because many of the products they sell (laundry detergent, paper towels, diapers, etc) also are sold by competitors. Offsetting this threat is P&G’s experience in handling this issue. It offers different sizes, versions and prices for their products. Shoppers will find laundry detergent, for example, in different sizes and different concentrations at different prices. They also can reposition brands as being a value or premium purchase.
Despite all this cleverness, the company still forecasts its next quarter’s earnings at $1 to $1.04 per share vs. analyst estimates of $1.14. Slower sales are expected globally. How P&G performs going forward will be influenced by the global economy. If the country runs into a double-dip recession, growth might stall. That’s not to say the company is in any trouble financially, given its free cash flow — it just might not be as enticing a growth play as this quarter’s earnings suggest. If, however, another recession does not come to pass, there might be room for some impressive growth. At the moment, analysts are looking at five-year annualized growth rates of 9.8%, which, when coupled with that 3.5% dividend, creates an enticing prospect.
Personally, I might wait to see how things develop in the next quarter for the economy before buying Procter & Gamble. I don’t see big downside in the stock, but upside is far from certain.
Lawrence
Meyers does not own shares of Proctor & Gamble.
