Why Now Looks Like a Good Time to Buy Procter & Gamble

Procter & Gamble (NYSE: PG) surprised many when it lowered its earnings guidance for the current quarter on Wednesday. The stock dropped 2.9% on the news, leaving some investors wondering if now was their chance to snap up shares of the iconic household-products maker.

In its press release, Procter & Gamble said that it expects adjusted earnings for its fiscal 2012 fourth quarter, which runs from April through June, to come in at $0.75 to $0.79 a share, down from its earlier forecast of $0.79 to $0.85.

The company forecasts net sales to be down 1% to 2% from the year-ago quarter, compared to the 1% to 2% gain it was expecting. That implies total sales of $20.45 billion to $20.66 billion.

Analysts were forecasting sales of $20.62 billion on $0.82 a share in earnings.

Significant Challenges Lie Ahead for Procter & Gamble

Even though it has been aggressively expanding overseas, Procter & Gamble still relies on developed economies, such as North America and Europe, for 60% of its sales. That has hobbled its sales growth as the U.S. economy continues to struggle and the sovereign debt crisis weighs on Europe.

At the same time, the company’s international sales have been hurt by the Chinese slowdown, state-mandated price cuts on its products in Venezuela and import restrictions in Brazil.

Throw in rising commodity prices and unfavorable exchange rates, which are expected to cut the company’s sales by 4% in the quarter, and you get a clearer picture of the challenges that Procter & Gamble is facing as it tries to get back on track.

Procter & Gamble Is Taking a “No Excuses” Approach

CEO Bob McDonald was forthright about the uphill climb the company faces: “It’s our job to overcome these [external factors],” he said, “but we haven’t always been able to do this, in part because we haven’t been hitting on all cylinders internally.”

Specifically, McDonald pointed to Procter’s lack of innovative new products: “We haven’t created a new category or a meaningful new brand in some time,” he said.

Investors have been frustrated that the company’s stock has badly trailed competitors like Colgate-Palmolive (NYSE: CL). However, Citi Investment Research analyst Wendy Nicholson felt there were some positives to take away from Wednesday’s news. In a note quoted in an article on Businessweek.com, she wrote, “P&G is clearly saying ‘no excuses’ and adopting a more aggressive stance about taking responsibility for and fixing their problems.”

JPMorgan was more bullish, affirming its Overweight rating and $72 price target, citing the company’s efficiency improvements as one reason. In a note quoted on Investors.com, the company said:

“In our view, PG has gained more conviction on ongoing cost savings, as evidenced by their recent revelation about a $10-billion cost saving opportunity, which should drive much needed operating margin expansion for the first time in years. We think the stock’s valuation relative to peers should move up as the company’s efforts to contain costs and gain share start bearing fruit.”

3 Strengths That Will Help Procter & Gamble Weather the Storm

Despite its struggles, Procter & Gamble has a number of (often underrated) strengths that will help it compete. Here are three:

  1.  Powerful brands: The company controls some of the most highly respected names in the household-products business, including Crest toothpaste, Tide detergent, Duracell batteries and Gillette razors.These well-known brands help Procter command strong customer loyalty. They’re also an important tool for expanding overseas, where their strong reputations help it match up with domestic competitors.
  2. Big savings from its restructuring: As JPMorgan pointed out, Procter & Gamble is now in the process of a restructuring that will see the company save $10 billion by 2016. A big part of these savings will come from cutting 5,700 non-unionized jobs by the end of 2013. The savings will help the company deal with rising raw material costs and compete with cheaper generic products.
    Along with that comes a more focused international expansion that will see it scale back its plans in emerging markets and focus on the 10 countries that are the most profitable—along with a renewed push in the U.S.
  3. Innovation: As investment writer David van Knapp points out on SeekingAlpha, Procter & Gamble has launched dozens of winning products in its history, from Crest toothpaste in 1955 to more modern products like the Swiffer, which changed the way floors are cleaned, and the highly popular Crest WhiteStrips tooth whitener.
    Even though it hasn’t hit any home runs lately, the company currently has a number of new products in its pipeline. To give itself a better chance of hitting the next Swiffer, CEO McDonald said that Procter would put the bulk of its resources into the 20 that it feels have the most potential.

Procter & Gamble Is a Dividend Superstar

Not to be overlooked is Procter’s high, safe dividend: the company has been paying dividends for 122 years, since it was founded in 1890.

In May, it increased its quarterly payout by 7.1%, to $0.562 a share, for an annualized yield of 3.72%. This is the 56th consecutive year that Procter has raised the dividend payment

When you add that to its stability (the stock has a beta rating of just 0.48, so it’s less than half as volatile as the overall market), it’s not hard to see why buying on Wednesday’s drop looks attractive.