September 24, 2009

Analysis : P&G US

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.

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.

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.

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.


investologic said...

Cant wait for your next post Rohit. I am a big fan of yours !! Please visit and put in your comments.
Best Regards

rbery said...

Hi Rohit,
Nice analysis of an iconic company. What are your views on P&G's listed Indian subsidiaries, PGHH and Gillette ? The oppurtunity for growth in India is immense and both these companies have been exploiting it. Would appreciate your views in case you have analysed them.

Vic said...

Thanks Rohit for your analysis on P&G, look forward to the next post.:-)


Rohit Chauhan said...

Hi rbery
i have in general avoided the indian subs. they have horrible coporate governance like other MNCs

madhav said...

Hi Rohit,

Just came across your blog thru Google search - nice blog. keep it up.

As a student of value investing, I have this question/ comment about your avoiding Indian market: Would a substantial margin of safety about 40-50% minimize the risk of corp. governance in MNC's? Are you comfortable investing in purely Indian companies? What is the difference?

FYI, I am going to grope around your blog for understanding how to calculate FCF (that was my search term that brought me to your blog) but I am looking for a definitive answer as the Indian fin. statements differ from that of US GAAP format and so depreciation and related items do not immediately ring a bell to me. I am also in search of investing tools that would make evaluating Indian cos. easier.


Anonymous said...

Hi Rohit,

I have been following your blog for about an year and i admit it has been a good learning experience. I wanted your take about Phil fisher's book - Common stock and Uncommon profits.

Methods that he suggested to do qualitative checks of the company(calling/meeting customers, cometitors etc.) makes sense but i can't possibly do it because i have a day job.
How do you gather your knowledge about qualitative aspects of the company which are not revealed by finnacial statements. You said in some earlier post that dealer lock in is higher in case of Asian Paints. As you had already mentioned that you had an advantage in that scenario as you had worked for Asian paints. But how do you go about these things in other industries( I am presuming you do considering the depth of your analysis.


Rohit Chauhan said...

Hi madhav
I am mainly india focussed with a few ideas on international stocks.

you will be able to find details on calculating FCF on my blog ..i have written about it in the past, though it may require some searching.

I personally do not think a discount takes care of the governance issue. ofcourse governance is not entirely black and white, but in cases where one cannot trust the management at all, it is best to avoid the company


Rohit Chauhan said...

hi amit
I have read the same book, which is a classic and face the same issue as any one else as i too have a day job.
asian paints was really an exception as i worked with the company, however for all other companies my source of data is limited to the published reports and the internet.
I really have not spoken to management or anyother stakeholders in the past.
I think it would improve my investing decision if i did that, but unfortunately as in your case, i too have a day job and cannot afford to this level of analysis as yet.
you will realise that with time and experience you will be able to learn quite a bit from the public sources and reduce the disadvantage you mention.
extensive reading is the only solution i can see for our constraint