Lisa Bernard Kuhn & Alex Coolidge report:
Bob McDonald on Friday will try to calm the critics and sell his turnaround plan, in his first public comments since an activist hedge fund bought into Procter & Gamble, suggesting a shake-up.
P&G’s president and CEO faces a tough crowd: Analysts, many with financial institutions that have invested billions into Procter and are growing impatient for a stronger return.
In the short run, the analysts’ “buy” and “sell” advice will carry substantial weight on Wall Street. In the longer run, the investors will assess in coming months whether to support a possibly more aggressive, yet undisclosed, approach by Bill Ackman and his hedge fund, Pershing Square Capital Management.
Friday morning, P&G will report financial results for the fourth quarter and full fiscal year that ended June 30, which the company already has warned will be underwhelming. Then, in a conference call, McDonald must persuade the analysts to give his restructuring plan time to work.
His performance will be widely watched for signals about the future of one of the region’s oldest and most respected companies. P&G stock is likely the most widely held in Greater Cincinnati and Northern Kentucky, where more than 12,000 people are employed by the company. Thousands more local retirees are living on P&G stock and its steady dividend returns.
Depending on company earnings announced Friday, McDonald’s conference call could be “contentious,” said Connie Maneaty, an analyst with BMO Capital Markets, which owns 1.9 million shares in P&G.
“Investors are fed up with results that come in short with expectations,” Maneaty said. “There is always an explanation for why things come up short, but the explanations haven’t been satisfactory.”
BMO Capital Markets nonetheless recommends buying P&G stock and gives it an “outperform” rating.
McDonald isn’t commenting. Federal securities laws limit the information companies can disclose prior to announcing their quarterly financial reports.
P&G’s decades-long approach to growth through innovation and acquisitions has positioned it as a tremendously profitable company, earning more than $85 billion last year – nearly quadruple that of its largest competitors.
At least two P&G brands – Tide and Pampers – bring in enough sales to qualify as Fortune 500 companies if they were stand-alone businesses.
But Wall Street today is impatient for short-term results in addition to long-term gain. Analysts cite the growth rate of P&G’s stock price, which lags smaller rivals that moved more quickly into emerging markets.
P&G stock closed on July 11, the day before the Pershing Square purchase became public, at $61.40 – virtually unchanged from the same day five years ago. It closed Wednesday at $64.01, down 53 cents on the day.
As P&G’s profits have lagged, analysts have turned up the volume on their discontent with the company’s performance, profits and missteps.
They criticized P&G’s decision last year to raise prices for certain products while competitors kept their prices stable.
The company has since restored lower prices on powdered Tide and Gain and some Crest and Gillette products. But the initial price increase cost P&G market share, and the subsequent price cut has cost it profits.
Analysts also suggest that the company’s $10 billion cost savings plan could be done more quickly and cut more deeply. The plan includes eliminating 5,700 jobs by the end of fiscal 2013.
Twice the company has lowered its profit expectations for the full year as it works to overcome sluggish growth in North America and Europe, where P&G does more than 60 percent of its business.
The company now says it expects its profit for the full fiscal year to be in the range of $3.82 to $3.88 per share, down from $3.93 to $4.03 per share.
Last month, P&G disappointed investors again when it lowered fourth-quarter profit expectations.
Ackman’s high-profile purchase last month has only crystallized the discontent.
“Investor patience is worn thin,” analyst Maneaty said.
Ackman bought a $1.8 billion stake in P&G – about 1 percent of the company – indicating he intends to take an activist role in pushing for changes to boost shareholder return. Analysts say that could mean pressuring P&G’s board to step up layoffs and possibly sell parts of the world’s largest consumer products company.
Nik Modi, an analyst with UBS in New York, doubts P&G will miss Wall Street expectations, considering they already have been lowered. Instead, the pressure will be on McDonald and other company executives to articulate a clear path to stronger performance.
“They have to instill confidence – it is essential to show they have a firm grip on the company’s challenges,” Modi said. “The next couple of quarters are crucial.”
UBS owns at least 7.6 million shares in P&G stock and rates it as “neutral,” meaning it neither recommends selling or buying shares.
Analysts and investors will want McDonald to sketch a time line for signs of improved sales, cost savings and profits as the company focuses on a back-to-basics strategy of stressing key brands and business lines in developed, rather than emerging, markets.
Erin Lash, an analyst with Morningstar in Chicago, said the worst that could happen on Friday is that McDonald lowers expectations for future financial performance even more. She agreed that the best McDonald can do is to provide a clear picture of how he intends to improve results.
“Bob tried to be more frank about the direction of the business on the last call – I hope that will continue,” she said. “Providing transparency is what the market wants.”
She expects McDonald will acknowledge Ackman’s investment, but doubts that he will comment much about it or offer details of any interaction with the hedge fund manager.
Morningstar owns just more than 83,000 P&G shares and gives the stock a three-star rating, which means it believes it is fairly valued.
In addition to the weak economic recovery in developed markets, P&G blames its lackluster performance on unfavorable foreign exchange rates and rising commodity prices that eat into profits.
The strong U.S. dollar, which has gained value against other major currencies with the lagging global economy, has taken a toll on P&G’s overseas operations. Europeans have less buying power with their weaker euros, meaning Cincinnati-based P&G earns less in those countries.
For European-based competitors like Unilever and L’Oreal, the strong dollar has the reverse impact: The value of its U.S. sales get a boost when converted back into the weaker euro at their home bases.
Still, some analysts have argued that P&G’s U.S.-based competitors, such as New York-based Colgate, operate in the same environments and have managed to deliver in spite of the challenges.
Colgate’s stock, for instance is up 50 percent over the same five years that P&G’s has remained flat.
P&G’s Mason Business Center, which employs about 2,400, is home to its pet care, pharmaceuticals and personal- and oral-care businesses.