Procter & Gamble. Business Summary

Transcription

1 Procter & Gamble 1 Analysis (last updated end of FY08) Business Summary Proctor & Gamble develops, manufactures, and sells consumer goods. Primary sales channels are mass merchandisers, grocery stores, membership club stores, and drug stores, Proctor & Gambles products are sold in over 180 countries. The company s business segments are described in the table below: Segment Products Key Brand Beauty Cosmetics, Deodorants, Hair Care, Personal Cleansing, Prestige Fragrances, Skin Care Grooming Health Care Snacks & Pet Care Home Care Family Care Blades and Razors, Electric Hair Removal Devices, Face and Shave Products, Home Appliances Feminine Care, Oral Care, Personal Health Care, Pharmaceuticals Pet Food, Snacks Air Care, Batteries, Dish Care, Fabric Care, surface Care Baby Wipes, Bath Tissue, Diapers, Facial Tissue, Paper Towels Head & Shoulders, Olay, Pantene, Wella Braun, Fusion, Gillette, Mach3 Actonel, Always, Crest, Oral-B Iams, Pringles Ariel, Dawn, Downy, Duracell, Gain, Tide Bounty, Charmin, Pampers Revenue by Geography Revenue by Segment Intl. Developing 30% United States 40% Family Care 16% Beauty 23% Home Care 28% Grooming 10% Intl. Developed 30% Snacks 6% Health Care 17% Page 1 of 6

2 Segment Beauty Grooming Healthcare Snacks Homecare Familycare OPM 19.0% 25.4% 24.8% 15.6% 21.2% 28.2% ROA 26.1% 28.6% 68.3% 33.1% 63.5% 31.5% Operating History (3.2) Ten Year Operating History ROAA OPM RORE RORE+D GM InvTurn E/FCF E/E+D-C 28.0% 18.7% 15.3% 10.0% 48.2% <- Rating ROAA: Return on Adjusted Assets; OPM: Operating Margin; RORE: Return on Retained Earnings; RORE+D: Return on Retained Earnings & Change in Debt; GM: Gross Margin; InvTurn: Inventory Turnover; E/FCF: Earnings to Free Cash Flow; E/E+D-C: Earnings to Earnings+Depreciation-Capex Organic sales growth was 6% from Earnings grew from 1972 to 1997 at an annualized rate of 13.9%; this period covered multiple recessions, two of them severe 1. Over the same period, the SP500 had an annualized EPS growth rate of 8%. Future Prospects (3) Procter & Gamble competes through differentiation, and spends heavily on research and development to create products that are differentiated from that of competitors, and spends heavily on advertising to signal the value of the company s brands. Due to their relationship with many retailers and investment in learning about consumer behavior, P&G has a good sense of what consumers want in a product, and can effectively focus research and development to create new products, and improve existing products to better meet consumer needs. P&G is decentralized, with global business units focused on individual countries. This cuts overhead, and more importantly, lets the business unit optimize operations for a particular country. The combination of global scale and local focus enhances the company s competitive advantage. Buyer Bargaining Power 1 From Jeremy Siegel s Stocks for the Long Run, chapter on nifty fifty. Page 2 of 6

3 A high absolute value of research and development spending allows the development of products that actually do add value over the products of rivals, and high spending on advertising facilitates the signaling of this value. Some examples: Detergent optimized for cold water washing (saves energy costs) Detergent optimized for single rinse (where clothes are washed by hand) Compact detergents to reduce packaging waste P&G s three tiered product line helps with pricing power, as the lowest tier acts as a price benchmark for customers deciding whether the higher tiers are appropriately priced. There is some retailer concentration, with Wal-Mart accounting almost 20% of sales. But Wal-Mart needs P&G about as much as P&G needs Wal-Mart, so their bargaining power is not enough to hurt P&G s profitability. If the company s on-line sales channel grows sufficiently (see under Threat of Substitutes ) then this will give P&G additional bargaining power with retailers. Supplier Bargaining Power Raw materials are primarily commodities, and are readily available from multiple sources. Labor is not organized, and is productive, with earnings per employee of close to $100,000. Threat of New Entrants Economies of scale allow P&G to spend much more than rivals on R&D and advertising. For example, P & G spends over twice as much on research and development than its nearest competitor. P&G s largest competitors by trailing 4 quarters revenue are Unilever ($60B), Kimberly Clark ($19B), and Johnson & Johnson s consumer segment ($16B). Only Unilever has the scale to come close to what P&G can spend on advertising. Procter & Gamble s advertising and R&D is spread over 44 brands that account for 90% of the company s profits. There are many opportunities to leverage proprietary technology among multiple categories. P&G s research and development is enhanced by a global relationship with nearly two million researchers in technology areas connected with P&G businesses. Moreover, these new products can be quickly brought to market using P&G s existing brands and distribution system. P&G s relative level of innovation is apparent from the results of the 2008 industrial research institute s pace setter study that measures the top new products measured by sales. In 2008, P&G had 10 out of 25 of the top new products in the non-food category. In comparison, Unilever, J&J, Kimberly Clark, Colgate, L Oreal, and Energizer collectively had 7. Company 2007 Revenue R&D Advertising Procter & Gamble 83.5 B 2.2 B 8.7 B Unilever (in Euros) 40.2 B 0.8 B 5.3 B Page 3 of 6

4 Kimberly Clark 18.3 B 0.3 B 0.5 B Colgate-Palmolive 13.8 B 0.3 B 1.5 B J&J Consumer Segment 14.4 B N/A N/A P&G consistently cuts costs unrelated to differentiation, giving P&G a cost advantage that acts as a barrier to entry. For example, continuous reformulation can provide the same product performance with different ingredients, allowing the formulation to be optimized for current commodity costs, and consequently saving on input costs. They also have similar developing country margins as developed country margins, so they apparently have a manufacturing system that geographically matches costs to the point of sale. P&G saves on the costs of materials by creating purchasing pools for common materials used over multiple product lines. P&G s distribution network reaches 800 M customers in China, 4.5M stores in India, and 80% of the Russian population. Threat of Substitutes Private label goods are a viable substitute for branded products; however, P&G s threetier pricing can reduce this threat. If the third tier (lowest cost brand) is priced close to that of private label products, and consumers prefer the tier 3 brand to the private label product, then retailers will need to allocate a proportionally higher amount of shelf space available for the tier 3 brand, at the expense of shelf space for private labels, thereby creating a barrier to entry for private label manufacturers and other potential new entrants to the industry. In their Q208 transcript, P&G mentioned that private label is not really an issue in developing world. Overall, it is not impacting P&G s market share. In their Q308 transcript, P&G mentioned that their products together with private label are gaining share. A potential offset to the private label threat is the on-line sales channel, where the company can price their products closer to that of private label competitors and still maintain the same margins. Today, P&G sells diapers directly from their Pampers website, and also sells numerous products on Amazon.com. P&G sells the types of goods that are typically resistant to diminishing demand during a recession. Intensity of Rivalry Note that the industry follows the semi-log pattern of size that is associated with stability. The major competitors in the industries where P&G competes all have strong brands; this tends to diminish rivalry. In developing economies, the consumer goods industry is expected to grow rapidly over the long-term; this will also reduce competition. Page 4 of 6

5 Other Consideration P&G continues to build manufacturing capacity in local markets. They also package and price products optimized for developing countries, and distribute them in local stores within walking distance of consumers. Major Risks Private label competition: P&G and branded competitors have opportunity to keep margins high as long as collectively they provide more value than private label competition. This will require continuous innovation. Over the last 13 years, an IRI pacesetters study found that 1/3 of the most successful new products over the 13 years have come from P&G, more than top six competitors combined. Upside P&G Sales per Capita Annual Sales in Dollars U.S UK Germany Mexico China India Country Despite P&G s large market share, there is considerable room for growth as the global economy expands, giving citizens of developing countries the ability to purchase consumer goods. P&G mentioned on their Q309 conference call that if per-capita use of P&G products in India reached that of Mexico, it would add $20 Billion in sales. Financial Strength (3.00) Page 5 of 6

6 Credit Rating Ave. Maturing Debt to Earnings Fixed Charge Pension Benefits Debt to RE Cov. Paid / PBT AA % The largest risk here is the $16.5B in debt (net of $4.5B in cash) due within one year, which is less than P&G s $13.6B in FY 2008 earnings. This is covered with $9B in committed credit facilities expiring in 2012, which gives P&G flexibility in paying down short-term debt if commercial paper markets freeze up. Management Summary Future Prospects Financial Strength Operating History Combined Rating Page 6 of 6