Can a New CEO Revive Procter & Gamble?

Procter & Gamble (NYSE:PG) has always been a beacon of stability in the stock market, as it’s characterized by a steady dividend and low systematic risk. Recently, though, lagging sales growth and an internal management shakeup have raised questions about the strength of the company. Can newly reappointed CEO A.G. Lafley restore investor confidence in the company? Let's use our CHEAT SHEET investing framework to decide whether P&G is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock's Movement

A.G. Lafley reassumed his position as CEO of P&G after Bob McDonald stepped down in May. Whether McDonald's retirement was voluntary was never publicly addressed, but investors were beginning to lose faith in his ability to grow the company. Shareholders have high expectations for Lafley, who quadrupled company profits during his previous tenure as CEO. So far, he has reorganized the company into four different divisions and promised to continue a cost-cutting program that will save around $10 billion in expenses by 2016 and increase gross margins.

To be fair, P&G's sluggish sales growth over the apst four years isn't all McDonald's fault. Stifled global demand and increased competition in the CPG industry have contributed to a more challenging business environment for P&G, whose well-known products include Tide, Pampers, and Gillette razors. P&G's product portfolio consists of higher-end consumer goods, and many consumers have substituted the more expensive P&G products with generic brands as the economy has remained sluggish. The global economy, however, looks to be improving, which will certainly help P&G's sales numbers in the coming quarters. P&G will announce its fiscal fourth-quarter earnings on August 1.

E = Earnings Are Increasing Year-over-Year

P&G's earnings have increased on a year-over-year basis over the last three quarters. The most recent quarterly number of 99 cents showed a modest increase of 5.32 percent from the previous year's quarterly earnings per share of 94 cents. Revenues increased by 2 percent this quarter, which was slightly below analysts' expectations. Management set earnings guidance in the fourth quarter between 69 cents and 79 cents per share, while analysts are projecting earnings of 77 cents — a 5 cent decrease from earnings per share in last year's fourth quarter. Investors reacted negatively to the guidance set by P&G in its previous earnings report, citing that it was weak in comparison to previous quarters.

	2013 Q3	2013 Q2	2013 Q1	2012 Q4	2012 Q3
Qtrly. EPS	$0.99	$1.22	$1.06	$0.82	$0.94
EPS Growth YoY	5.32%	10.91%	2.91%	-2.38%	-2.08
Revenue Growth YoY	2.00%	1.98%	-3.67%	-1.17%	1.51%

S = Support is Provided by Institutional Investors

Activist investor Bill Ackman has taken a special interest in P&G since unveiling $1.8 billion last July. Ackman regularly criticized McDonald's management of the company. The stock price has benefitted from Ackman's interest: shares are up around 35 percent since Ackman disclosed his position to the public. Another notable institution with a large position in P&G is Warren Buffett's Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), which holds around 2 percent of outstanding shares.

E = Exceptional Performance Relative to Peers?

While Procter & Gamble is relatively cheap, trading at a price-to-equity ratio of 18.21, it lags behind its competitors and the personal products industry as a whole in several key metrics. P&G enjoys a healthy dividend yield of 3 percent and recently declared a 7 percent dividend increase. Still, competitors Unilever (NYSE:UL) and Kimberly-Clark (NYSE:KMB) have higher dividend yields. Unilever is also outpacing P&G in emerging markets: 55 percent of Unilever's sales come from emerging markets versus 38 percent of sales at P&G. P&G will need to increase its presence in emerging markets to avoid losing out on high growth prospects to Unilever. P&G does dominate both Kimberly-Clark and Unilever in terms of market cap, however.

	PG	KMB	UNL	Industry
Trailing P/E	18.21	21.66	21.37	27.64
Operating Margin	20.0%	15.7%	13.6%	15.9%
ROE	17.5%	35.6%	32.3%	23.4%
Dividend Yield	3.0%	3.2%	3.3%	2.8%

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T = Technicals on the Stock Chart Are Strong

Proctor & Gamble is currently trading at around $81.55, above both its 200-day moving average of $76.51 and its 50-day moving average of $78.28. The stock has experienced a strong uptrend in the past year and is up 25.83 percent in the past 12 months — slightly higher than the S&P 500. The stock is trading about 1.5 percent below its 52-week high of $82.54, which it hit in late April.

Conclusion

The consumer packaged goods sector looks healthy as recent global macroeconomic conditions have improved. As consumers’ discretionary incomes rise, worldwide demand for personal products should strengthen. P&G, with some of the most recognizable brands in the world, is in a solid position to capitalize on this growth. Additionally, the company has increased its dividend, which is yielding an attractive 3 percent, at least once a year since 1957. With the recent management shakeup and A.G. Lafley's proven leadership, P&G looks committed to get back on track. As macroeconomic conditions continue to improve, P&G shareholders will benefit from sales growth without facing much downside risk. Procter & Gamble is an OUTPERFORM.