16 February 2010

PG: Financial Gauge Analysis for the December 2009 Quarter

This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for Procter & Gamble (NYSE: PG).  The metrics were calculated using data in P&G's financial reports, including the 10-Q for the quarter that ended 31 December 2009.

We have already examined the Income Statement for the December quarter, which was the second quarter of the company's fiscal 2010.  Procter & Gamble earned $1.01 from continuing operations and $0.48 from discontinued operations.  An after-tax gain of $1.46 billion on the divestiture of the pharmaceuticals business was responsible for most of the earnings from discontinued operations.

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.  Some background information about P&G and the business environment in which it is currently operating can be found in the beginning of the look-ahead

The latest quarterly results produced the following changes to the gauge scores:

As a consequence of the divestiture, P&G restated some historical financial statements to recast the pharmaceuticals business as a discontinued operation.  We used the latest numbers when computing the financial metrics listed below.

Cash Management31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Current Ratio0.
Debt/CFO (years)
Inventory/CGS (days)71.775.475.369.6
Finished Goods/Inventory64.6%66.6%65.0%66.5%
Days of Sales Outstanding (days)29.830.832.230.6
Working Capital/Revenue-9.8%-12.9%-10.3%-5.4%
Cash Conversion Cycle Time (days)46.049.357.352.9
Gauge Score (0 to 25)151155

Since late 2006, P&G has had a lot of short-term debt, such as commercial paper, on its Balance Sheet.  This inflated the company's Current Liabilities, pushed its Current Ratio below 1.0 and turned Working Capital negative.  For a blue-chip, creditworthy company, this situation is not as worrisome as it might be for a smaller firm with less access to the credit markets.

There is now, however, an indication that P&G might be easing its reliance on short-term financing.  Debt due within one year was between $12 billion and $22 billion at the end of every quarter between December 2006 and September 2009.  However, Short-term debt obligations were reduced to $7.8 billion at the end of December 2009.

Long-term debt, now $22.3 billion, did not change appreciably, nor did Cash and equivalents.  It would appear that P&G chose to use funds from the pharmaceuticals divestiture to pay off short-term debt. 

The reduction in total Debt, short- and long-term, is also seen in the reduced period of Cash Flow from Operations, now 1.8 years, that would be required to repay the debt.

A reduction in the Inventory level and the Finished Goods proportion also helped the Cash Management gauge score in the recent quarter.

Growth31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Revenue growth-4.5%-6.8%3.7%6.2%
Operating Profit growth5.2%5.4%15.1%11.3%
CFO growth26.2%5.3%-10.1%18.9%
Net Income growth-3.1%-8.0%5.2%15.8%
Gauge Score (0 to 25)6368
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 Growth metrics for this consumer products company have undoubtedly been affected by slower economic conditions worldwide.  Product divestitures have also made the company smaller.

The gauge score received a small lift from the big increase in the Cash Flow from Operations.  However, the bulk of the increase can be attributed to changes in Working Capital and one-time gains.

Profitability31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Operating Expenses/Revenue79.1%79.6%80.3%80.1%
Free Cash Flow/Invested Capital14.5%13.2%10.4%11.7%
Accrual Ratio-3.0%-0.2%2.0%-0.6%
Gauge Score (0 to 25)11878

Operating Expenses during the last year as a percentage of Revenue for the year were more than a percentage point lower than during the previous year, improving profitability.

Free Cash Flow as a percentage of Invested Capital has improved substantially, and the Return on Invested Capital has been stable.

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

Value31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)12.613.117.118.6
Gauge Score (0 to 25)1316137
Share Price ($)$60.63$57.92$61.82-

The P/E multiple expanded slightly on lower earnings and a share price that ended the year not much different from the price at the start. 

A higher PEG value also worked against the gauge score.  However, this downward pressure was partially offset by the lower EV/CFO.

Overall31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Gauge Score (0 to 100)48453629

The Cash Management, Growth, and Profitability gauges each inched up.  These increases were able to overcome a 3-point drop in the contrarian, but double-weighted Value gauge.

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

1 comment:

  1. Nice to see you use an example to explain the theory. This is where a lot of sites go wrong but it is clear here.