17 May 2010

PG: Financial Gauge Analysis for the March 2010 Quarter

Procter & Gamble (NYSE: PG) earned $0.83 per diluted share in fiscal 2010's third quarter, which ended 31 March.  P&G made $0.01 less per share than it earned in the March 2009 quarter.  Core earnings, more favorably, shot up from $0.81 per share to $0.89.

In our earlier review of P&G's Income Statement, we compared the actual results to our "look-ahead" estimates.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for P&G and the associated financial gauge scores.  The metrics were calculated using data from P&G's current and historical financial statements, including the latest 10-Q report.

Procter & Gamble, which traces its roots back to 1837, sells well-known personal and household products from its Cincinnati headquarters to consumers worldwide.  Additional background information about P&G and the business environment in which it is now operating can be found in the beginning of the look-ahead

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

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

After selling its pharmaceuticals business to Warner Chilcott (NASDAQ: WCRX), P&G restated some historical financial statements to depict the pharmaceutical results as a discontinued operation.  We used the latest numbers when computing the financial metrics listed below.

Cash Management31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Current Ratio0.
Debt/CFO (years)
Inventory/CGS (days)68.371.776.169.8
Finished Goods/Inventory65.2%64.6%66.7%66.6%
Days of Sales Outstanding (days)28.329.831.030.5
Working Capital/Revenue-7.1%-9.8%-12.1%-5.5%
Cash Conversion Cycle Time (days)
Gauge Score (0 to 25)151586

After reducing its short-term debt obligations for the last five consecutive quarters, P&G's Balance Sheet now lists $7.04 billion of debt due within one year.  This figure was over $21 billion in the third and fourth quarters of 2008. 

Even though P&G has long had excellent credit ratings (e.g., Moody's Aa3) and access to financing, we couldn't help but be nervous about the high short-term debt level when the credit markets weren't functioning effectively.

The $3 billion in cash P&G received on the sale of its pharmaceuticals business to Warner Chilcott helped make a dent in the total debt level.

The Inventory has become much leaner in the last year, and the level is back below its longer-term average.

The cash efficiency metrics have all improved.  The Inventory is much leaner that it was last year, and it is now lower than its long-term average.  The Cash Conversion Cycle Time is down steeply.

Growth31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Revenue growth-1.0%-4.5%0.7%5.4%
Operating Profit growth4.9%5.3%12.1%9.5%
CFO growth29.3%26.2%-6.9%17.9%
Net Income growth-0.8%-3.1%4.1%13.4%
Gauge Score (0 to 25)7648
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.

Although still negative on a trailing-year basis, quarterly Revenue increased 7.4 percent in the March 2010 period, from $17.9 billion to $19.2 billion.  Encouragingly, product unit volume rose in all operating regions and at five of P&G's six reporting business segments.

Net Income growth also improved in the latest quarter, and Earnings growth would have been even more robust if the latest quarter had not included a one-time health care-related tax charge of roughly $150 million.

P&G credits the healthy rate of increase in Cash Flow from Operations to reductions in Working Capital as Accounts Payable and Other Liabilities increased.

Profitability31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Operating Expenses/Revenue78.9%79.1%80.3%79.9%
Free Cash Flow/Invested Capital15.7%14.5%10.5%12.3%
Accrual Ratio-3.5%-3.0%2.1%-0.8%
Gauge Score (0 to 25)131178

Operating Expenses as a percentage of Revenue have been slowly decreasing, which improves Profitability.

The Return on Invested Capital increased 50 basis points, a nice rise.  Free Cash Flow as a percentage of Invested Capital also improved substantially.

The decrease in the Accrual Ratio is also a positive development, signaling better earnings quality.  However, it would be more meaningful if Net Income was increasing.

Value31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)12.512.613.116.9
Gauge Score (0 to 25)1214227
Share Price ($)$63.27$60.63$47.09-

The P/E multiple expanded modestly on lower earnings and an increasing share price.  The higher PEG value also put negative pressure on the Value gauge score. 

The Price/Sales and EV/CFO ratios are both lower than their five-year averages, which is a positive factor.

Overall31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Gauge Score (0 to 100)49495230

The changes to the gauge scores during the March 2010 quarter were minor.  Growth and Profitability inched up; Cash Management was stable, but there were signs of improvement in the underlying metrics.  Value, which is double-weighted in the Overall score calculation, fell a couple of points.

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

No comments:

Post a Comment