Starting Hitches For Procter & Gamble In 2015

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Feb 03, 2015

Procter & Gamble Co. (PG, Financial), the largest global consumer products business managed to break above the $80-$85 resistance level to close out FY2014 at $91.09 for a 15.4% gain, including dividend adjustments. The company, with a market cap of $246 billion at the fiscal 2014 year-end, saw its shares trading in the $75.26-$93.89 range over the year. P&G followed up its 2014 performance with a modest first quarter for 2015, where the company’s core earnings per share increased 2% over a year ago to $1.07. However, the company’s performance in the second quarter of FY2015 took a massive beating, with Q2 2015 profits falling 31% owing to unprecedented currency devaluations.

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Currency Woes Hurt Earnings Growth

In the recently revealed Q2 earnings for 2015, Procter & Gamble’s earnings per share slid from $1.15 from the year ago quarter to $1.06, falling well short of expert estimates, while net sales dipped 4% from the prior-year figures to touch $20.2 billion. Net income decreased from $3.43bn or $1.18 per share from the prior-year quarter to $2.37 billion, or $0.82 per share.

With almost 60% of Procter & Gamble’s business generated outside of North America, FY2015 has been a particularly challenging year for the company, since nearly every currency across the world, especially the Russian Ruble, has been devalued against the US dollar. Consequently, while earnings fell nearly 8% year over year including a foreign exchange headwind of $0.16 a share, earnings excluding currency headwinds grew 6% on the back of productivity savings and pricing and mix gains. Although organic sales grew in all but the Healthcare and Beauty, Hair & Personal Care ventures of the company during the second quarter, foreign exchange hurt revenues by 5%.

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However, P&G is not the only company to be hit by foreign exchange woes. The currency effect also hurt Kimberly-Clark Corp. (KMB, Financial), which recently posted lower than expected sales and profit. Another competitor, Unilever (UL, Financial), also reported lost ground in sales as the company’s growth declined in the fourth quarter of FY2014 after witnessing nine months of gains.

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Outlook for 2015

The stronger dollar is expected to eat away at the company’s international sales and earnings, reducing sales by 5% and net after-tax earnings by 12% for FY2015. Consequently, experts estimate a decline of 3% to 4% in net sales, with core earnings growth also expected to be flat for the remainder of the year. The company, which has already divested in its Pet Care venture and announced plans to exit the Duracell personal power business, is looking to shed around 100 of its underperforming brands in a bid to rein in costs and focus on stronger brands, leading to a probable upturn in sales and earnings by the end of the fiscal year.

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Reiterating its earlier forecast for 2015, the company announced that sales (not including the effects of divestitures & acquisitions and currencies), would see a low- to mid-single-digit percentage rate growth while currency-neutral core earnings per share, excluding items such as impairment and restructuring charges, would witness growth by a double-digit percentage.

Our Take

Although P&G expects to deliver core earnings per share matching that of FY2014, the company’s uninspiring organic growth across segments and its seeming lack of ability to offset foreign exchange fluctuations with pricing and productivity has experts concerned. Consequently, experts have pegged its stock at a consensus price target of $92.89 for FY2015 with a trading range of $75.26-$93.89 across 52 weeks.