The Procter & Gamble Company (PG): The Hedge Fund Trade

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The Procter & Gamble Company (NYSE:PG) saw a 5% plus pullback in its stock last week after reporting unimpressive quarterly results; however, this consumer-products giant owns some of the most recognized products in the world; selling items in more than 180 countries around the world. So is the pullback a great opportunity to jump into the stock?

I think so, as The Procter & Gamble Company (NYSE:PG) has 50 brands and include some of the world’s most commonly used household names, representing around 90% of the company’s sales and profits. These 50 brands include $25 billion brands that generate more than $1 billion in sales annually.

The pullback was related to its fiscal 3Q 2013 earnings that came in at $0.99 per share, beating management guidance of $0.90 to $0.96. Sales in 3Q were up 2%, but the growth was below management expectations of 3% to 4% due to higher-than-expected foreign currency headwinds. The company also reduced its fourth quarter (next quarter) outlook, with earnings expected to decline from the year-ago results.

Turnaround efforts

The Procter & Gamble Company (NYSE:PG)The Procter & Gamble Company (NYSE:PG) is looking to improve results in developed markets, while also turning to the developing nations for future growth. This involves a focus on its 40-largest and most profitable businesses, most of which are already deployed in developed markets. These businesses also happen to account for about 50% of sales and 70% of operating profit. Other initiatives include the focus on its 20-largest innovations, such as Tide Pods, Always Radiance, Bounty Trap & Lock and Bounty Unstoppables, which includes diffusing these products in more markets.

Other plans include improving net manufacturing productivity by 5% annually, which is expected to generate $10 billion in cost reductions by the end of fiscal 2016. The details include a workforce reduction of 5,700 by the end of fiscal 2013, and then a further reduction of non-manufacturing jobs by an additional 2% to 4% per year from fiscal 2014 through 2016.

Highlights

  • The Procter & Gamble Company (NYSE:PG) is also able to generate impressive free cash flow. During fiscal 2012, P&G generated some $9.3 billion in free cash flow, which represented 90% cash flow productivity. Meanwhile, for fiscal 2011, cash flow productivity was only 84%.
  • The Procter & Gamble Company (NYSE:PG) has consistently increased its dividend. The dividend increase of 7% in April 2012 was the 56th consecutive year for a dividend hike.
  • The company also repurchased shares worth $7 billion in fiscal 2011 and $4 billion in fiscal 2012. In fiscal 2013, P&G plans to repurchase shares worth $5 billion to $6 billion, higher than prior expectations of $4 billion to $6 billion.

Other notable consumer-products companies include Johnson & Johnson (NYSE:JNJ) and Colgate-Palmolive Company (NYSE:CL). Johnson & Johnson managed to beat expectations, with EPS coming in at $1.44 per share and 5.1% above the year ago earnings of $1.37 per share. Johnson & Johnson engages in research and development, manufacture and sale of a various products in the healthcare field.

The current relative valuation level is expensive, given the stock has traded almost on par with the S&P 500 Index over the past 12 months, but currently trades at a 25% premium. What’s more is that Johnson & Johnson (NYSE:JNJ)’s five-year earnings growth estimate at 6.2% is below the average estimate of 8.2% for the S&P 500 companies.

Colgate-Palmolive Company (NYSE:CL) has its own challenges, other than competition from the likes of The Procter & Gamble Company (NYSE:PG) and Johnson & Johnson. This includes currency headwinds in Venezuela. Colgate generates some 5% of its total sales from the country, which remains prone to challenges and there will be difficulty in maintaining profitability if the government in Venezuela restricts pricing decisions of the companies to offset the possible rise in raw-material prices.

Since 1997, there have only been two periods when earnings did not increase, going down $0.04 per share from 2003 to 2004, and then falling $0.06 per share from 2009 to 2010. Over the last 10 years, earnings have grown by 9.5% and the dividends have grown by 12.5%.

Yet Colgate has produced relatively unimpressive results over the past four quarters, having either met or only marginally beat earnings over the last four quarters compared to P&G, which has beat EPS by at least 3% over the same quarter. It is promising that analysts expect the company to grow EPS by an annualized 9.6% over the next five years.

The hedge fund trade

Going into 2013, P&G had impressive hedge fund interest, with 56 hedge funds long the stock. These include notable billionaire hedge fund owners, namely Warren Buffett of Berkshire Hathaway (check out Buffett’s high upside picks), with approximately a $3.6 billion position and making up 4.8% of its total 13F portfolio. The second-largest stake was held by Bill Ackman of Pershing Square with a $1.9 billion position and 20.7% of its 13F portfolio invested in the stock.

At the end of 2012, there were a total of only 30 hedge funds long Colgate-Palmolive Company (NYSE:CL). This includes Lansdowne Partners with the top position, a $359 million position and comprising 6% of its 13F portfolio. The second-largest stake is held by Jim Simons’ Renaissance Technologies with a $332 million position (check out Simons’ cheap stock picks).

Meanwhile, Johnson & Johnson (NYSE:JNJ) had the most interest of the three consumer- products companies, with 67 hedge funds long the stock, a 15% decrease from one quarter earlier. Its top manager includes billionaire Ken Fisher of Fisher Asset Management, which has the top position worth close to $728 million (check out Fisher’s dividend picks).

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