Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The Procter & Gamble Company (PG), Colgate-Palmolive Company (CL): Old CEO, New Prospects

There have been numerous successful turnarounds for companies after their old CEO’s have been hired back. But for every successful company like Apple Inc (NASDAQ:AAPL), there have been companies like Dell Inc. (NASDAQ:DELL) where the comebacks couldn’t bring about success.

The Procter & Gamble Company (NYSE:PG)Cincinnati-based The Procter & Gamble Company (NYSE:PG) is an addition to this list of companies as ex-CEO Bob McDonald — who struggled to turn around the world’s largest consumer-products maker — has been replaced by the company’s old CEO A.G. Lafley. Will this move turn around a company that has been under-earning and has lower sales growth worse than its peers, such as Colgate-Palmolive Company (NYSE:CL), Unilever N.V. (ADR) (NYSE:UN) and L’Oreal?

Ackman pressure and earnings report

The now ex-CEO Bob McDonald’s turnaround efforts weren’t showing any improvements, and the company also reported lackluster results for the quarter ended March 2013. Activist investor Bill Ackman — who owns the hedge fund Pershing Square — has slightly less than 28 million shares of P&G.

It is speculated that Ackman pressured the company into removing McDonald. What could have led Ackman do this? The March 31 quarter reported a slight increase in organic sales of about 3%. Profits were reported to be approximately $2.6 billion, up from $2.4 billion reported for the same quarter last year. Shares, which were trading at an all-time high of $82.54, fell about 5% after the poor earnings report. A few reasons for P&G “under-earning,” as described by Pershing Square, are listed below:

Source:  Pershing Square

Competitors and the road ahead

P&G has been facing stiff competition from the likes of Colgate-Palmolive Company (NYSE:CL), Johnson & Johnson (NYSE:JNJ), Unilever N.V. (ADR) (NYSE:UN) and L’Oreal.

Colgate-Palmolive Company (NYSE:CL) offers a wide variety of home products, but its major business segment has been the oral care industry. For the same quarter during which P&G reported lackluster earnings, Colgate-Palmolive Company (NYSE:CL) reported earnings of $1.32 per share, up from $1.24 for the same quarter last year. Colgate-Palmolive Company (NYSE:CL) has been a shareholder-friendly company, consistently paying dividends to its investors. For the last fiscal year, it paid dividends of $1.22 per share.

The earnings growth for Colgate-Palmolive Company (NYSE:CL) has been quite impressive; the management expects year-over-year earnings growth for fiscal year 2013 to be around 5.5% to 6.5%.The company has also announced a $10 million cost reduction program where it aims to improve its net manufacturing margin by 5% each fiscal year.The following table makes a comparison between the valuations of both Colgate-Palmolive and The Procter & Gamble Company (NYSE:PG) –

Source – Yahoo! Finance, (P/E ratio is trailing-12 months)

Compared to P&G, Colgate-Palmolive looks overvalued to me. A high price-to-operating-cash-flow ratio as compared to P&G indicates that the company doesn’t have significant cash flow to reinvest in the business.The dividend yield is also low as compared to P&G. High valuation multiples and a high debt-to-equity ratio as compared to P&G makes me bearish on this stock.

Johnson & Johnson (NYSE:JNJ) delivered solid first-quarter earnings results. It reported EPS of $1.22 per share, with the domestic sales increasing by 11.2% and international sales increasing by 6.3%. The company has confirmed its earnings outlook for the full fiscal year 2013 of $5.35 to 5.45 per share. The following chart shows a comparison of the stock performance of P&G and Johnson & Johnson:

Source – Yahoo! Finance

Shares of Johnson & Johnson recorded a 52-week high of $85.90 on April 29. After a dull performance over the last three years, shares have finally been performing well and rising steadily from the $62 level in June 2012. After seeing a decline in P&G’s stock from $65 to around $44 in the first quarter of fiscal year 2009, the stock recorded a 52-week high of $82.50 on April 23.