Procter & Gamble Is No Bargain
By Aaron Back
Dow Jones Procter & Gamble posted underwhelming results on Thursday that, while far from disastrous, provide no reason for optimism on its stock.The maker of Oral B toothbrushes and Bounty paper towels said sales in its fiscal second quarter ended in December fell 1% from a year earlier. On an organic basis, stripping out currency fluctuations, sales were up 5%. But that obscures some underlying weakness: Volumes fell across all of its categories, meaning the top line was salvaged through price increases.They still weren't enough to maintain margins as costs soared: Gross margins were down 1.6 percentage points from a year earlier, and earnings per share fell 4%. Shares were down around 1% in early trading Thursday.On a conference call, Chief Executive Jon Moeller repeatedly struck a gloomy tone on the state of global affairs. "The world seems to want everything to be better, as do I. That's not reality, though. There is an incredible amount of uncertainty that remains. Nobody really understands what the recovery rate in China is going to be, for example."Yet Chief Financial Officer Andre Schulten insisted the company won't budge from its strategy of investing in the quality and "superiority" of its products, which in practice can mean everything from research and development to marketing. He told analysts that any savings from lower commodity prices or more favorable exchange rates in the second half of the fiscal year could be spent on these kinds of initiatives rather than fall to the bottom line."We believe this is a rough patch to grow through, not a time to reduce investment in our business," he said.That is almost certainly the right long-term strategy for P&G, whose brands -- from Gillette razors to Pampers diapers -- tend to occupy the high end of their categories. Better product quality is key to maintain share and justify price increases, even during tough economic times. Mr. Moeller cited Dawn Powerwash Dish Spray as an example, which boasts of faster and easier dishwashing.The question for investors, however, isn't just whether P&G has the right approach, but also whether the stock offers good value at this point. Here the answer is more doubtful. P&G shares are down around 9% over the past 12 months, but they are well off lows hit in October last year. The stock currently trades at a rather rich 23.9 times forward earnings, according to FactSet analyst consensus -- higher than its 10-year average of 21.2 times. Food companies, which have seen more resilient sales and margins, have performed better as safe-haven plays.P&G products might be worth paying a premium for. Right now that can't also be said of its stock.