In our earlier review of P&G's Income Statement, we compared the actual results to our "look-ahead" estimates.
We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value. This post reports on the metrics for P&G and the associated financial gauge scores. The metrics were calculated using data from P&G's current and historical financial statements, including the latest 10-Q report.
Procter & Gamble, which traces its roots back to 1837, sells well-known personal and household products from its Cincinnati headquarters to consumers worldwide. Additional background information about P&G and the business environment in which it is now operating can be found in the beginning of the look-ahead.
In summary, P&G's latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 15 of 25 (unchanged from December)
- Growth: 7 of 25 (up from 6)
- Profitability: 13 of 25 (up from 11)
- Value: 12 of 25 (down from 14)
- Overall: 49 of 100 (unchanged)
The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary. Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.
After selling its pharmaceuticals business to Warner Chilcott (NASDAQ: WCRX), P&G restated some historical financial statements to depict the pharmaceutical results as a discontinued operation. We used the latest numbers when computing the financial metrics listed below.
| Cash Management | 31 Mar 2010 | 31 Dec 2009 | 31 Mar 2009 | 5-Yr Avg |
| Current Ratio | 0.9 | 0.9 | 0.7 | 0.9 |
| LTD/Equity | 34.4% | 32.4% | 33.7% | 39.9% |
| Debt/CFO (years) | 1.7 | 1.8 | 2.8 | 2.7 |
| Inventory/CGS (days) | 68.3 | 71.7 | 76.1 | 69.8 |
| Finished Goods/Inventory | 65.2% | 64.6% | 66.7% | 66.6% |
| Days of Sales Outstanding (days) | 28.3 | 29.8 | 31.0 | 30.5 |
| Working Capital/Revenue | -7.1% | -9.8% | -12.1% | -5.5% |
| Cash Conversion Cycle Time (days) | 41.0 | 46.0 | 53.8 | 52.7 |
| Gauge Score (0 to 25) | 15 | 15 | 8 | 6 |
After reducing its short-term debt obligations for the last five consecutive quarters, P&G's Balance Sheet now lists $7.04 billion of debt due within one year.
Even though P&G has long had excellent credit ratings (e.g., Moody's Aa3) and access to financing, we couldn't help but be nervous about the high short-term debt level when the credit markets weren't functioning effectively.
The $3 billion in cash P&G received on the sale of its pharmaceuticals business to Warner Chilcott helped make a dent in the total debt level.
The cash efficiency metrics have all improved. The Inventory is much leaner that it was last year, and it is now lower than its long-term average. The Cash Conversion Cycle Time is down steeply.
| Growth | 31 Mar 2010 | 31 Dec 2009 | 31 Mar 2009 | 5-Yr Avg |
| Revenue growth | -1.0% | -4.5% | 0.7% | 5.4% |
| Revenue/Assets | 58.9% | 56.1% | 56.8% | 58.3% |
| Operating Profit growth | 4.9% | 5.3% | 12.1% | 9.5% |
| CFO growth | 29.3% | 26.2% | -6.9% | 17.9% |
| Net Income growth | -0.8% | -3.1% | 4.1% | 13.4% |
| Gauge Score (0 to 25) | 7 | 6 | 4 | 8 |
Although still negative on a trailing-year basis, quarterly Revenue increased 7.4 percent in the March 2010 period, from $17.9 billion to $19.2 billion.
Net Income growth also improved in the latest quarter, and Earnings growth would have been even more robust if the latest quarter had not included a one-time health care-related tax charge of roughly $150 million.
P&G credits the healthy rate of increase in Cash Flow from Operations to reductions in Working Capital as Accounts Payable and Other Liabilities increased.
| Profitability | 31 Mar 2010 | 31 Dec 2009 | 31 Mar 2009 | 5-Yr Avg |
| Operating Expenses/Revenue | 78.9% | 79.1% | 80.3% | 79.9% |
| ROIC | 12.6% | 12.1% | 12.0% | 12.2% |
| Free Cash Flow/Invested Capital | 15.7% | 14.5% | 10.5% | 12.3% |
| Accrual Ratio | -3.5% | -3.0% | 2.1% | -0.8% |
| Gauge Score (0 to 25) | 13 | 11 | 7 | 8 |
The Return on Invested Capital increased 50 basis points, a nice rise. Free Cash Flow as a percentage of Invested Capital also improved substantially.
The decrease in the Accrual Ratio is also a positive development, signaling better earnings quality. However, it would be more meaningful if Net Income was increasing.
| Value | 31 Mar 2010 | 31 Dec 2009 | 31 Mar 2009 | 5-Yr Avg |
| P/E | 15.1 | 14.5 | 10.5 | 19.1 |
| P/E vs. S&P 500 P/E | 0.8 | 0.7 | 0.6 | 1.1 |
| PEG | 3.1 | 2.7 | 0.9 | 1.3 |
| Price/Sales | 2.5 | 2.5 | 1.9 | 2.7 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.5 | 12.6 | 13.1 | 16.9 |
| Gauge Score (0 to 25) | 12 | 14 | 22 | 7 |
| Share Price ($) | $63.27 | $60.63 | $47.09 | - |
The P/E multiple expanded modestly on lower earnings and an increasing share price. The higher PEG value also put negative pressure on the Value gauge score.
The Price/Sales and EV/CFO ratios are both lower than their five-year averages, which is a positive factor.
| Overall | 31 Mar 2010 | 31 Dec 2009 | 31 Mar 2009 | 5-Yr Avg |
| Gauge Score (0 to 100) | 49 | 49 | 52 | 30 |
The changes to the gauge scores during the March 2010 quarter were minor. Growth and Profitability inched up; Cash Management was stable, but there were signs of improvement in the underlying metrics. Value, which is double-weighted in the Overall score calculation, fell a couple of points.
Full disclosure: No position in PG at time of writing.
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