Markets & Finance

A Sparkling Quarter for Procter & Gamble


Procter & Gamble (PG), the maker of brands such as Pampers diapers, Tide detergent, and Crest toothpaste, reported first-quarter results that were mostly in line with analysts' forecasts. And even though it raised its outlook for fiscal year 2007, investors did not seem overly impressed.

The Cincinnati-based consumer products company says net earnings in the quarter ended Sept. 30 rose 33% to $2.7 billion, thanks to strong sales growth, including the addition of Gillette, and continued margin improvement. Earnings per share came in at 79 cents, up from 77 cents a year ago, while sales rose 27% to $18.79 billion.

The EPS number includes 5 cents to 6 cents a share in dilution from the 2005 acquisition of Gillette. Excluding the acquisition, diluted earnings per share would have grown by 9% to 10%, P&G says. Organic sales -- which exclude the impacts of acquisitions, divestitures, and foreign exchange -- increased 6%, at the top end of the company's long-term target range.

The company also says profit margin expanded during the quarter as sales growth, cost savings projects and the benefit of adding the higher margin Gillette business more than offset acquisition-related expenses and higher commodity costs.

As for its outlook, P&G says it sees second-quarter EPS of 81-83 cents on a 5%-8% sales rise. Due to a better commodity and energy cost forecast, the company raised its fiscal year 2007 EPS forecast to $2.97-$3.02 on a 9%-11% sales rise (4%-6% organic growth).

"Looking forward, we expect earnings per share growth to accelerate driven by strong base business results, the ramp-up of Gillette synergies and an improving cost environment," says A.G. Lafley, the company's chairman of the board, president and CEO, in a press release.

Despite the upbeat outlook, P&G shares took a breather after hitting a 52-week high of $64.02 on Oct. 30. P&G shares fell about 1% to $63.14 during trading on Oct. 31.

Some analysts remain bullish on the stock. Merrill Lynch analyst Christopher Ferrara, who kept a buy recommendation on the stock, says the shares were indicated to fall when he issued his research note before the company's conference call, owing partially to the gain in the price ahead of the company's earnings report. "We still think that barring anything unforeseen in the conference call, early momentum sellers could give way to more long-term focused buyers," wrote Ferrara in a note.

Ferrara notes that the company's fiscal year 2007 forecast of $2.97-$3.02 was a tad below his forecast for $3.03. On the bright side, he says the company's blade and razer sales growth of 12% in the first quarter exceeded his 6% forecast. Plus, the company's organic sales growth outlook for the second quarter of 4-7% is above his 5.2% estimate. "A result anywhere near the high-end of that range should be a favorable sign for investors, as is the fact that +7% is even npart of the discussion," Ferrara wrote.

Loran Braverman at Standard & Poor's Equity Research (S&P, like BusinessWeek, is owned by McGraw-Hill) reiterated a strong buy recommendation on P&G shares. EPS of 79 cents was in line with the analyst's estimate, but the 5-6 cents of dilution related to Gillette was slightly above forecast.

Braverman increased fiscal year 2007 (June) EPS estimate by 2 cents to $3.00, with minor reductions in our forecasts for net other expense and share count. The analyst also raised the p-e-based 12-month target price by $6 to $74 to reflect increased peer multiples and greater visibility of earnings growth.


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