Sunday, October 26, 2014

Procter & Gamble (PG): Earnings Commentary

I have to admit PG is one of my favorite companies. It is a solid leader within its industry and its products are recognized globally for value and quality. In case you were not aware, PG is the owner of the following brands:

I actually purchased shares of P&G back in 2012 as part of a family members portfolio. The stock has been doing very well since time of purchase. This recent earnings call was particularly interesting as CEO A.G Lafley has announced that PG will exit the pet care industry, selling off their division to another company. They'll also be spinning off Duracell which will be operating as a stand-alone company. 

I have to admit one of the reasons why I love studying businesses (I did a lot of that during my MBA years) is because it intrigues me to see the strategies companies come up with in order to remain competitive, grow, and strengthen their leadership position. In exiting a particular division and spinning off another, P&G is looking to focus on their "biggest opportunities", as it was noted in their earnings report. My take away from reading about this initiative is that PG wants to zero-in on those businesses in their portfolio of brands which they feel can continue growing for the utmost profitability . This will help ensure a focus and will help them remain remain successful.

Here are some of the financial highlights of the earnings call:
  • Earnings per share increased 2% year over year to $1.07 per share
  • Organic sales across all segments increased 2% for the quarter
  • Net sales for the quarter were at $20.8, remaining flat in comparison to same quarter last year.
  • Operating cash flow for the quarter was at $3.6 billion while free cash flow was at $2.8 billion.
  • A total of $4.2 billion was returned to shareholders in the form of dividends and share buy-backs.
  • Health care segment organic sales increased 7% while baby, feminine and family care segment organic sales increased four percent. All other segments remained unchanged.
As per CEO Lafley, results were on track with expectations.

Brief background on Duracell-- The business was acquired in 2005 as part of Gillette (Procter and Gamble acquired Gillette corporation back in 2005 and this included all the businesses and brands within it). Since the acquisition took place, Duracell has continued to strengthen its position as the global market leader in the battery category. As per Lafley: “It’s a business with attractive operating profit margins and a history of strong cash generation. I’m confident the business and its employees will continue to thrive as its own company.”

I don't know for sure why but I have a good feeling about the strategies P&G is undertaking and I have confidence in that management is doing a phenomenal job running this company. I am not sure whether I'd like to participate in trading in some PG shares for Duracell once the company officially goes off on its own, but I may consider it. We'll see what happens. In the meantime, my family member is to remain a happy shareholder of PG.

Tell me, what are your thoughts on the Duracell spin off? were you surprised?