Alexander Coolidge Cincinnati Enquirer
Published 3:11 p.m. UTC Jul 30, 2018
Procter & Gamble stock has rebounded from a multi-year low hit in late spring – but pessimism may be driving the rally.
There’s nothing the company has disclosed or news in the market that would justify a rally. Two analysts, in fact, have downgraded their “buy” ratings on the stock this month to “holds.”
The consumer giant will report its fiscal year 2018 (ended June 30) results on Tuesday where it is expected to post modestly-improved numbers and slow-and-steady progress on its turnaround efforts.
Shareholders could be hopeful P&G’s forecast for the 2018-19 fiscal year will look better than the sluggish one just finished. Or investors might believe P&G could use the event to disclose a new effort to shake up the company, including job cuts, plant closings or the sale of a business unit.
The company has a history of using financial announcements as opportunities to disclose big new strategies.
In recent years, P&G has unveiled several bold plans in the back end of summer: last year, it launched its counter-attack against Peltz; in 2016, it announced a New Jersey plant closure; in 2015, David Taylor was tapped as the next CEO and the company disclosed the sale of 43 beauty brands; and in 2014, then-CEO A.G. Lafley announced his plan to exit 100 slow-growing brands.
So far this summer, P&G’s rebound was aided after activist investor – and newly-minted board member – Nelson Peltz told CNBC in June that his restructuring proposals were under “serious consideration” by fellow board members. P&G shares are still down more than 10 percent in 2018.
This spring P&G stock hit a 2018 low of $70.73 but as of the close Friday was $80.58.
The hedge fund manager joined the board in March following a seven-month proxy battle that resulted in P&G giving him a board seat to end a stalemate.
Wall Street analysts expect P&G will report an $11 billion profit before one-time items on sales of $66.9 billion, according to Zacks Research.
Last year, the company reported a $15.3 billion profit (that included a huge one-time $5.2 billion gain from the spin-off of 41 beauty brands) on sales of $65.1 billion.
Here’s what to watch:
Is there one magic number?
P&G could pleasantly surprise investors with a strong fourth-quarter finish despite three uninspiring quarters before it.
But if P&G closes out the year with another whimper, all eyes will be on the company’s sales guidance for the year.
P&G has shown it can keep growing earnings through tough times, but shareholders are anxious to see it boost sales, which have been stalled for nearly a decade.
In 2017, P&G said organic sales (which excludes foreign exchange, acquisition and divestiture impacts) would grow between 2 to 3 percent. This spring the company said it would still hit the range, but toward the bottom end.
Shareholders are impatient for P&G to jump-start sales growth to levels in the first decade of the Millennium when former CEO Lafley averaged 5 percent growth a year. To restore investors’ faith in its turnaround, P&G needs to promise – and deliver – improved sales results.
But if P&G forecasts another year of 2 to 3 percent organic sales, shareholders will likely grow even more impatient.
Big, scary, ugly numbers
But is P&G likely to pull a rabbit out of its hat in the form of a surprise turnaround or the promise of improved sales results in this fiscal year?
Jefferies analyst Kevin Grundy is skeptical. He noted organic sales results have disappointed in the most recent quarter reported by rivals Colgate-Palmolive, Kimberly-Clark and Unilever.
The problem? The same forces that have battered the big household package goods on and off for years: increased competition from niche players and retailers’ house brands, which saps their pricing power, while commodity costs threaten to erode profitability.
“Challenges persist in HPC… the balance of power shift to retail, macro/competitive issues in EMs (emerging overseas markets) and constrained pricing all remain evident,” Grundy wrote on Friday in a note to investors. ”We expect similarly challenging earnings reports… particularly P&G and Clorox.”
For nine months ending the March quarter, P&G reported weak demand and rising costs were cutting hundreds of millions from its sales and profitability.
Rising costs pared 0.9 percent from is gross margin in nine months (a $440 million impact) and sales slid another $440 million from P&G cutting prices on products with consumers still trading down to cheaper products.
Will P&G play a wild card?
So if P&G is under pressure to deliver encouragement to shareholders, but the financials are uninspiring, will executives again use the disclosure of annual results to announce new-and-improved turnaround plans?
That could explain P&G’s rally: the stock could be rebounding because investors believe change is in the air.
Some possibilities could include a detailed update on P&G’s $10 billion restructuring plan. In 2016, CEO Taylor pledged to cut those expenses by 2021 – but executives noted a hefty chunk of the costs would come later in the five-year plan as P&G overhauled its supply chain.
With the ramping up of a giant new West Virginia factory and plans to close a handful of smaller ones, P&G could spell out whether it plans to close any more plant and more detail on when the company will realize the savings.
P&G could also be mulling deepening its restructuring plans, such as additional layoffs or further brand sales.
Last year, Peltz won widespread shareholder support as he campaigned criticizing the plodding pace of P&G’s turnaround. He lashed out at the company’s “suffocating bureaucracy,” called for eliminating management layers and cutting the five business units to three.
If sales growth continues to elude P&G, executives could be considering at least cherry-picking some of Peltz’s proposals that the investor says were getting a closer look.
For the latest on P&G, Kroger and Cincinnati business, follow @alexcoolidge on Twitter.
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