Analysis : P&G US

About
Procter & Gamble is an 79 billion dollar consumer goods company with well known brands such as pampers, gillette, charmin, bounty, tide, pantene etc. The company has operations across 180 countries across the world and operates in the beauty products, health and household care segment.

Financials
PG has consistently maintained an ROE in excess of 25% with a moderate leverage of around 0.5. The drop in the ROE since 2006 is more due to the accounting related to the Gillette accquisition than a drop in the profitability levels.
The company has become a more efficient user of capital by increasing its Fixed asset turns by 25% in the last 6-7 years and by turning Working capital negative during the same period. It has utilised the excess cash to reduce the debt ratios, maintain the dividend levels and buy back stock.
The company has been able to improve its Net margins from around 9% to almost 14% in the last 10 years. It has done this while maintaining an ad expense of around 10% of sales and almost 2.7% expense in R&D
The company has doubled its sales and tripled its profits in the last 10 years too.

Positives
The company under the leadership of A G Lafley has been performing fairly well. The company has increased its focus on innovation in various aspects of the business such as new product, packaging, cost management etc. This focus goes beyond the customary lip service and can be seen via the new product launches and continued volume growth in mature categories. The company continues to invest almost 10% of sales in advertising and upto 3% of sales in R&D which is the highest in the industry.

The company has a successful history of developing and maintaining strong brands. In addition the company also has an enviable marketing and distribution infrastructure which cannot be replicated easily.

The company has been able to grow the topline in high single digits for the last few years with volume growth in most of the categories in the 3-6% range. The value growth in the various categories has been in low double digits range due to the above volume growth in combination with price increases and favourable foreign exchange changes. The company is also growing in low double digits in most categories in the developing markets such as India, China and middle east.

The various financial parameters such as ROE (in excess of 20%) and net profit growth (in double digits for the last few years) have been extremely good. The company has also been able to successfully accquire and integrate gillette and thus gain cost synergy and increased leverage in the market.

Finally the company has been able to generate free cash flows in excess of net profits which it has been using to reduce debt and buyback stock.

Risks
The company is undergoing a transition at the top with Robert Mcdonald as the new CEO. Although the company is unlikely to suddenly change direction and focus, the change is occuring at a time when the volume growth has slowed down due to the recession

The company has recorded negative sales growth in the current year. Although the volume degrowth is not alarming considering the global recession, drops in market shares in categories such as feminine care, male dry shaving, batteries, fabric care and drops in the braun appliance range is a cause of worry and needs to watched closely in the future.

The company operates in a very competitive industry where the low priced local competitiors and store brands are competing in most of the categories of the company. As a result the company faces intense competiton in most of its product categories.

Next post : Competitive analysis, Management quality checklist, Valuation and conclusion.