Jeremy Glaser: For Morningstar.com, I am Jeremy Glaser. Procter & Gamble reported mixed quarterly results today. I am here with Equity Analyst Lauren DeSanto to take a deeper look.
Lauren, thanks for talking with me today.
Lauren DeSanto: Thanks for having me, Jeremy.
Glaser: So, can you give us just the bird's eye view of what this quarter looked like for Procter & Gamble and what went wrong for them?
DeSanto: Well, I would say it was a quarter where a lot of investment and advertising support really hurt them from an earnings standpoint. It wasn't unexpected. They have had a number of product launches in the pipeline for a long time. And so, it was pronounced in this quarter. So operating margins declined significantly. I think it was just a bit of a shock to a lot of people by how much.
So, while you had, I think, relatively healthy volume growth, the top line wasn't as strong as some would like because of also promotional activity at the shelf. Gross margins held fairly steady. But it was the operating income line that kind of just was a shocker.
Glaser: So, certainly, we've been worried about the consumer for a long time now, and even the drug stores deciding if they are going to buy Tide or buy a private label detergent, is that something that we got any insight to in this quarter with Procter & Gamble?
DeSanto: Well, there was a lot of discussion about private label. I think private label is a serious problem in certain categories and in certain of P&G's categories. But this is a company that's investing in brands for the long term, and I think they are able to come up with new products that are compelling for consumers, that consumers will want to buy regardless of the times.
So the question is, can they make them profitable? How profitable can they make them? So they have new Bounty basics, Charmin basics, they have these new value proposition products, new value offerings, and P&G is really working to make sure that they have something at the value end, that they have something at the premium end, no matter where the consumer is with their spending that they are able to meet them there.
Glaser: Are investors going to have to maybe accept lower margins from Procter & Gamble and other consumer packaged goods products going forward?
DeSanto: I don't know. I think maybe for the short term, I think you are going to see pretty – it's going to be a tough situation from a margin standpoint certainly over the next year. But I wouldn't say longer term that there are no opportunities for margin expansion. I would say that P&G has opportunity to trade consumers up to higher margin products in many overseas markets.
So, right now what you see is negative mix in P&G's results. It is a function of going into new markets where most of the products entrants are lower-priced products. Well, that's not going to stay that way for ever. So, in new markets as they introduce higher margin products as consumers do better in developing markets, they trade up, they move up. So I think there is opportunity that maybe some of the negative mix effect over the long term isn't going to remain in place.
Glaser: Are any of the other consumer packaged goods firms better positioned if the consumer is reset at this lower level or do you think Procter & Gamble may be able to keep its really commanding share there?
DeSanto: I think they are pretty well positioned. I mean it's definitely tough. It's certainly become a little bit long over the time horizon than I think many had expected for the shares to recover. But I would say it's a company with great scale. Extremely intuitive company in terms of understanding the consumer, great consumer insight, research and development just across the board are some of the best.
They've got the distribution around the world. They've got a great brand portfolio that's got higher-end products, lower-end products. I think they are really well positioned to meet the consumer wherever they are. Another good company is Colgate. They are also well positioned, but they are in more limited categories.
Glaser: So that investment thesis that maybe had got investors into Procter & Gamble for years still holds even if the consumer is a little bit weak in the coming years or even if private label continues to be a persistent problem?
DeSanto: I think so. You've got a solid balance sheet. We've given it AA on Morningstar credit rating. You get a 3.5% dividend yield. Just recently they raised the dividend 9.5%. You get paid to wait for the company to kind of where I think it's going to be longer term. I think it's very undervalued now and I think longer term it will recover too. You'll start to see acceleration in the top line and EPS.
Glaser: Sounds great, Lauren. Thanks for talking with me today.
DeSanto: Thanks for having me, Jeremy.
Glaser: For Morningstar.com, I'm Jeremy Glaser.