24 August 2010

PG: Financial Gauge Analysis for the June 2010 Quarter

Procter & Gamble (NYSE: PG) earned $0.71 per diluted share in fiscal 2010's fourth quarter, which ended 30 June.  Earnings per share decreased 11 percent when compared to the $0.80 P&G made in the same quarter of 2009.

Core EPS, a non-GAAP measure that excludes certain items, fell from $0.78 to $0.71.

A previous article examined P&G's Income Statement for the June quarter.  Reported earnings were $0.06 less than the $0.77 per share we had forecast.

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 those in the latest Annual Report.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Procter & Gamble, which traces its roots back to 1837, creates and markets many well-known branded consumer staples to customers around the world.  P&G has three global business units:  Beauty and Grooming, Health and Well-Being, and Household Care. 

The company's market capitalization is currently around $175 billion, which makes P&G the sixth-most valuable U.S. corporation.  P&G, having raised its dividend for more than 50 consecutive years, is an S&P 500 Dividend Aristocrat.  P&G is also number 6 on Fortune Magazine's 2010 list of the World's Most Admired Companies

Additional background information about P&G and the business environment in which it is currently operating can be found in 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 Management30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Current Ratio0.
LTD to Equity34.8%34.4%32.6%38.0%
Debt/CFO (years)
Inventory/CGS (days)65.368.375.769.8
Finished Goods/Inventory64.0%65.2%67.6%66.6%
Days of Sales Outstanding (days)27.628.330.830.5
Working Capital/Revenue-5.7%-7.1%-13.3%-5.4%
Cash Conversion Cycle Time (days)34.341.049.552.3
Gauge Score (0 to 25)1815117

The Cash Management gauge has risen sharply because of debt management, inventory control and cash efficiency.

Although up a notch from March, the ratio of total Debt to Cash Flow from Operations is down substantially from last year and earlier.  P&G's short-term debt obligations rose from $7.0 billion to $8.5 billion in the latest quarter, but long-term debt decreased from $22.9 billion to $21.4 billion.  The total of the two types of debt obviously stayed the same.

The ratio of long-term debt to shareholders' equity increased slightly because equity was reduced by share repurchases.

P&G's Inventory has become very much leaner in the last year.  A 10-day decline is rather remarkable, and the lower percentage of Finished Goods is also positive.

Days of Sales Outstanding and the Cash Conversion Cycle Time, which are related measures of cash management efficiency, have both improved.

Growth30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Revenue Growth2.9%-1.0%-3.2%4.1%
Operating Profit Growth2.5%5.0%8.3%6.3%
CFO Growth7.7%29.3%-0.6%12.5%
Net Income Growth2.5%-0.8%-5.4%10.4%
Gauge Score (0 to 25)13719
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 latest increase in the Growth gauge score was mostly due to Revenue growth.  Revenue rose 4.7 percent in the June quarter, which was enough to turn the trailing-year growth rate from negative to positive.  The improvement of Revenue as a percentage of Assets is also a favorable development.

P&G attributed sales growth to "new product innovation, increased marketing spending and incremental merchandising support."  The volume of products sold increased a laudable 8 percent, "driven by growth in all business segments, regions, and key countries."  Volume growth was 5 percent in developed markets and 12 percent in developing markets.

Although Net Income declined in the most recent quarter, the trailing-year growth rate actually improved.

The rate of increase in Cash Flow from Operations eased.

Profitability30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Operating Expense/Revenue79.7%78.9%80.0%80.0%
Free Cash Flow/Invested Capital14.1%15.7%11.8%12.5%
Accrual Ratio-2.1%-3.5%0.6%-0.7%
Gauge Score (0 to 25)111368

Up until the last quarter, Profitability had been increasing as P&G had been having success trimming Operating Expenses as a percentage of Revenue.  This progress came to an end in the June quarter.  Operating expenses, SG&A in particular, increased a sizable 17 percent because P&G spent more to grow market share and to support new products.

The ROIC eked out a small gain, bu Free Cash Flow declined as a percentage of Invested Capital. 

The Accrual Ratio signaled good earnings quality, but slightly less so than three months earlier

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.

Value30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)13.112.512.815.7
Gauge Score (0 to 25)1111207
Share Price ($)$59.98$63.27$51.10-

The Value gauge didn't move as the decline in earnings and the decline in the share price almost balanced each other out.  The P/E multiple fell slightly.

The Price/Sales ratio is significantly less than its 5-year average, but it's not quite a low as it was in June 2009.

Overall30 Jun 201031 Mar 201030 Jun 20095-Yr Avg
Gauge Score (0 to 100)51494731

The Overall gauge crossed the 50-point threshold because of continued moves upward by the Cash Management and Growth gauges.   This improvement was partially offset by the Profitability gauge giving back some of the increase it had earned earlier.  Value, which is double-weighted in the Overall score calculation, was static because the share price adjusted to weaker fundamentals.

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

No comments:

Post a Comment