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:
- Cash Management: 15 of 25 (up from 11 in September)
- Growth: 6 of 25 (up from 3)
- Profitability: 11 of 25 (up from 8)
- Value: 13 of 25 (down from 16)
- Overall: 48 of 100 (down from 45)
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 Management||31 Dec 2009||30 Sep 2009||31 Dec 2008||5-Yr Avg|
|Days of Sales Outstanding (days)||29.8||30.8||32.2||30.6|
|Cash Conversion Cycle Time (days)||46.0||49.3||57.3||52.9|
|Gauge Score (0 to 25)||15||11||5||5|
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 $22.3 billion, did not change appreciably, nor did Cash and equivalents. It would appear that P&G chose to use funds from the pharmaceuticals divestiture to pay off short-term debt.
The reduction in total Debt, short- and long-term, is also seen in the reduced period of Cash Flow from Operations, now 1.8 years, that would be required to repay the debt.
A reduction in the Inventory level and the Finished Goods proportion also helped the Cash Management gauge score in the recent quarter.
|Growth||31 Dec 2009||30 Sep 2009||31 Dec 2008||5-Yr Avg|
|Operating Profit growth||5.2%||5.4%||15.1%||11.3%|
|Net Income growth||-3.1%||-8.0%||5.2%||15.8%|
|Gauge Score (0 to 25)||6||3||6||8|
The Growth metrics for this consumer products company have undoubtedly been affected by slower economic conditions worldwide. Product divestitures have also made the company smaller.
The gauge score received a small lift from the big increase in the Cash Flow from Operations. However, the bulk of the increase can be attributed to changes in Working Capital and one-time gains.
|Profitability||31 Dec 2009||30 Sep 2009||31 Dec 2008||5-Yr Avg|
|Free Cash Flow/Invested Capital||14.5%||13.2%||10.4%||11.7%|
|Gauge Score (0 to 25)||11||8||7||8|
Operating Expenses during the last year as a percentage of Revenue for the year were more than a percentage point lower than during the previous year, improving profitability.
Free Cash Flow as a percentage of Invested Capital has improved substantially, and the Return on Invested Capital has been stable.
The decrease in the Accrual Ratio is also a positive development, signaling better earnings quality.
|Value||31 Dec 2009||30 Sep 2009||31 Dec 2008||5-Yr Avg|
|P/E vs. S&P 500 P/E||0.8||0.6||0.7||1.1|
|Enterprise Value/Cash Flow (EV/CFO)||12.6||13.1||17.1||18.6|
|Gauge Score (0 to 25)||13||16||13||7|
|Share Price ($)||$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.
|Overall||31 Dec 2009||30 Sep 2009||31 Dec 2008||5-Yr Avg|
|Gauge Score (0 to 100)||48||45||36||29|
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.