Shares of The Procter & Gamble Company (NYSE:PG) jumped $3.18, or 4%, to $81.88 after the ouster of embattled CEO Bob McDonald and the announcement that he will be replaced by former CEO A.G. Lafley.
McDonald, at the helm since 2009, had been under the microscope from the consumer products giant’s board amid a string of weak earnings reports. While he did make some notable progress of late, refocusing on P&G’s best-selling brands and cutting costs, sales growth has trailed rivals Colgate-Palmolive Company (NYSE:CL) and Unilever plc (ADR) (NYSE:UL).
For the quarter ended March 31, The Procter & Gamble Company (NYSE:PG) posted lackluster results. Profits came in at $2.57 billion, up from $2.41 billion in the same quarter a year ago. Net sales rose a slim 2% to $20.6 billion. Organic sales increased 3%, coming in at the low end of the company’s forecast.
Shares, up 22% since the start of the year to an all-time high of $82.54, stumbled nearly 5% following the uninspiring report.
The company has been reducing headcount and slashing costs in an effort to fund the development of new products such as single-dose Tide Pods laundry detergent and thicker Bounty paper towels. But competitors have fought back with some heavy discounting, weighing on P&G’s progress in this area.
In addition, The Procter & Gamble Company (NYSE:PG)’s Olay skin-care line continues to underperform. It’s those kinds of limp showings that prompted McDonald’s expulsion.
Rivals giving P&G a run
Earnings for Colgate-Palmolive Company (NYSE:CL)’s latest quarter were $1.32 per share on revenue of $4.32 billion, up from $1.24 per share and revenue of $4.30 billion in the same quarter a year ago. For the current fiscal year, Colgate is expected to post EPS of $2.85.
The company just split shares 2-for-1. A leading stock-split theory says a company splits shares when they are trading well above the target range for where the company would like its shares trade. Forward splits are a good indication of sustained and strong earnings going forward.
Over the last 10 years, a 2-for-1 split model portfolio has produced a 14% annualized return, besting the 8% gain for the Standard & Poor’s 500 index, including dividends, according to Hulbert Financial Digest.
That suggests Colgate’s future looks solid.
Founded in 1806 by William Colgate as a starch, soap and candle company, Colgate now markets a broadly diversified mix of products worldwide running the gamut from household and personal care products to industrial supplies to sports and leisure time equipment.
Pet advocates applaud the fact Colgate-Palmolive Company (NYSE:CL) was one of the first companies recognized by PETA as an entity that tests on animals only when mandated by government regulations. In addition, Colgate continues to actively seek alternative testing methods.
Income seekers also like Colgate’s polished 2.22% yield.
Meanwhile, the outlook for Anglo-Dutch consumer goods company Unilever is dovish. The company, whose products include Dove soap, Ben & Jerry’s and Magnum, attributed its sluggish growth since the start of 2013 to the waning European economy and cold weather.
While first-quarter sales rose 4.9%, goosed by a 10.4% rise in emerging markets, the number was below the expected growth of 5.6%. In Europe, sales dipped 3.1%, hurt by the ongoing Eurozone recessionary environment.
The slow start to 2013 caused some analysts to question if the 6.2% growth target for the full year is attainable.
Chief Executive Paul Polman was also cautious: “Developed markets growth remained sluggish. Europe faced a particularly strong prior year comparator and whilst the overall performance was solid, the reported growth was held back by the slow start to the ice cream season and weakness in spreads.”
With the economy in Europe still challenged, Unilever plc (ADR) (NYSE:UL)’s results are also apt to be challenged in the months ahead.
How Procter & Gamble could clean itself up
Despite all the drubbing and challenges ahead, The Procter & Gamble Company (NYSE:PG) is an appealing investment.
Over the past year, P&G shares are up some 26%, ahead of rival Colgate and just a few percentage points behind Unilever plc (ADR) (NYSE:UL). Shares trade at an 11% discount to Colgate’s on a forward P/E multiple.
Looking forward, revamping tried-and-true lines and creating innovative products could get customers and shareholders excited.
Also, as the Wall Street Journal noted, “slimming down the [company’s] cost structure” could prove lucrative.
The Procter & Gamble Company (NYSE:PG)’s operating margin has stayed at roughly 19% the past several years, well below the nearly 24% maintained by Colgate. “That is extraordinary given P&G’s scale advantage: Its sales are almost five times the size of Colgate’s,” WSJ writes.
Productivity improvements could also provide some big payoffs.
Hopes are high CEO Lafley will clean up and spruce up what needs cleaning and sprucing. Lafley garnered his revered reputation for brokering The Procter & Gamble Company (NYSE:PG)’s $57 billion acquisition of Gillette in 2005, which gave P&G’s sagging grooming and beauty division a much needed face-lift.
We’ll see if Lafley still has the goods to lift P&G again.
The article What’s Next for Procter & Gamble originally appeared on Fool.com is written by Diane Alter.
Diane Alter has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. Diane is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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