02 November 2009

PG: Financial Gauge Analysis for the September 2009 Quarter

In a previous article, we examined Procter & Gamble's (NYSE: PG) Income Statement for the September 2009 quarter and compared the figures on each line to our "look-ahead" estimates.  Earnings in this first quarter of fiscal 2010 increased from $1.03 to $1.06 per share. 

Using the financial statements in the earnings announcement and the more detailed 10-Q, we have now updated a set of Cash Management, Growth, Profitability and Value metrics. This post reports on the metrics and the associated financial gauge scores.

Some background information about Procter & Gamble and the business environment in which it is currently operating can be found in the beginning of our look-ahead. Based in Cincinnati, P&G sells well-known consumer products, including Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay.

In summary, P&G's latest quarterly results has produced the following changes to the gauge scores:

  • Overall: 43 of 100 (down from 44)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash ManagementSep 2009Jun 2009Sep 20085-Yr Avg
Current Ratio0.
Debt/CFO (years)
Inventory/CGS (days)77.071.973.869.0
Finished Goods/Inventory66.6%67.6%66.0%66.5%
Days of Sales Outstanding (days)31.529.332.030.2
Working Capital/Invested Capital-4.3%-9.4%-13.2%-5.5%
Cash Conversion Cycle Time (days)49.638.857.052.8
Gauge Score (0 to 25)8524

P&G's Current Assets have been less than Current Liabilities, as seen in the Current Ratio below 1.0 and the negative Working Capital, for several years.   This is still the case, but the difference between Current Assets and Liabilities improved to a more normal level in the latest quarter.

Current Liabilities are higher than what would normally be expected because of P&G's practice of having a substantial amount of its debt due in less than one year.  Short-term debt, mostly likely commercial paper, has ranged between $12 billion and $22 billion since December 2006.  In the September 2009 quarter, P&G took the positive step of cutting short-term debt from $16.3 billion to $13.0 billion.

Total Debt, including both short- and long-maturity paper, would now require 2.2 years of present Cash Flow from Operations to redeem.  This is a nice reduction from recent quarters.

The increase in Inventory to Cost of Goods Sold appears due to anomalous Inventory spike one year ago, which gets included in the averages. 

GrowthSep 2009Jun 2009Sep 20085-Yr Avg
Revenue growth-6.8%-4.1%7.0%8.1%
Operating Profit growth6.8%9.6%19.0%13.6%
CFO growth5.3%-0.6%11.2%17.4%
Net Income growth-7.3%-5.6%11.9%18.1%
Gauge Score (0 to 25)31139
1. Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.  The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The worldwide recession, the once-stronger U.S. dollar, and divestitures (Folgers to Smucker plus pharmaceuticals to Warner Chilcott) weakened P&G's Revenues.  Product price increases (+2 percent) and volume declines (-3 percent) essentially canceled each other out in the last couple of quarters.

These factors have also cut into Cash Flow growth and Net Income growth.

A relatively good September quarter stemmed the declines and allowed the Growth gauge to pick up a couple of points.  The nascent rebound still has a way to go.

ProfitabilitySep 2009Jun 2009Sep 20085-Yr Avg
Operating Expenses/Revenue79.3%79.7%79.8%80.1%
Free Cash Flow/Invested Capital13.2%11.8%12.1%14.1%
Accrual Ratio-0.2%0.6%-0.2%-0.2%
Gauge Score (0 to 25)8698

Operating Expenses as a percentage of Revenue are trending lower on a trailing four quarters basis.

We may be seeing a modest, but encouraging, rebound in ROIC and (especially) FCF/IC. 

The decrease in the Accrual Ratio is actually a positive development, signaling better earnings quality.

ValueSep 2009Jun 2009Sep 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)13.112.817.117.9
Gauge Score (0 to 25)162076

The price of P&G shares increased 13.3 percent, from $51.10 to $57.92, in the September quarter.  This increase came on top of an 8.5 percent price rise in the June 2009 quarter.

These gains have put some pressure on the Value gauge, although the shares do not (with the exception of PEG) appear to be expensive compared to this company's norms.

OverallSep 2009Jun 2009Sep 20085-Yr Avg
Gauge Score (0 to 100)43442927

The Cash Management, Growth, and Profitability gauges each inched up, but these modest increases were balanced by a 4-point drop (hardly earthshaking) in the contrarian, but double-weighted Value gauge.  P&G's results from the September quarter showed signs (e.g., much better-than-expected Gross Margin) of progress, and we would consider the shares appealing on pull back that would allow the Value gauge to regain a few of the points it recently shed.

Full disclosure: No position in PG at time of writing.

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