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The Procter & Gamble Company (PG): 3 Reasons I’m Bearish on This Household-Name Stock

Over his nine-year initial tenure as CEO, Lafley racked up $26 billion in long-term debt, to make the total $37 billion. He maintained a 13.43% ROIC during this time. Capital-intensive industries often finance growth through debt — but that isn’t necessary for The Procter & Gamble Company (NYSE:PG). McDonald actually paid down P&G’s debt by $4 billion in his four years at the helm, while also maintaining an average of 13% ROIC.

The two CEOs commanded very different strategies while maintaining similar managerial effectiveness. But in terms of revenue growth, there is large discrepancy:

Lafley’s first term as CEO

PG Revenue Quarterly YoY Growth data by YCharts

McDonald as CEO

PG Revenue Quarterly YoY Growth data by YCharts

So, why should we expect Lafley’s performance as CEO to be any different this time around?

3. Expansion into Africa with high long-term debt

Expansion into Africa might seem like a good idea for any company . Many other companieshave found success in this emerging market. According to McKinsey, emerging markets hold the key to long-term growth for consumer products companies. P&G looks to expand operationsby investing $170 million in a new plant.

But expanding requires investment, and capital. With $32.22 billion (and increasing) in long-term debt, and Lafley’s past spending habits, P&G might be getting into more debt trouble. Expansion in Africa is a great idea, but maybe not right now.

A good company, rocky times

P&G has been around for 100-plus years, and it will probably survive another 100. With a 2.9% dividend, the stock is an appealing income play. But I think headwinds are in sight.

The Procter & Gamble Company (NYSE:PG) will go through a difficult transition period. Now, near its 52-week high, I recommend shorting, taking profits, or waiting for a pullback before going long. I see this stock bottoming out near support around $70 before it climbs back up. Long-term, P&G has a strong outlook and can be trusted moving forward. But first, it needs to clean up its balance sheet and ante up returns on its capital. And until it does, I’ll stay bearish.

This article was written by Andrew Deckert and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle.  Neither has a position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. Marie is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article 3 Reasons I’m Bearish on This Household-Name Stock originally appeared on Fool.com and is written by Marie Palumbo.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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