This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for Procter & Gamble (NYSE: PG). The metrics were calculated using data in P&G's financial reports, including the 10-Q for the quarter that ended 31 December 2009.We have already examined the Income Statement for the December quarter, which was the second quarter of the company's fiscal 2010. Procter & Gamble earned $1.01 from continuing operations and $0.48 from discontinued operations. An after-tax gain of $1.46 billion on the divestiture of the pharmaceuticals business was responsible for most of the earnings from discontinued operations.
Based in Cincinnati, P&G sells well-known consumer products, including Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay. Some background information about P&G and the business environment in which it is currently operating can be found in the beginning of the look-ahead. The latest quarterly results produced the following changes to the gauge scores:
- Cash Management: 15 of 25 (up from 11 in September)
- Growth: 6 of 25 (up from 3)
- Profitability: 11 of 25 (up from 8)
- Value: 13 of 25 (down from 16)
- Overall: 48 of 100 (down from 45)
As a consequence of the divestiture, P&G restated some historical financial statements to recast the pharmaceuticals business as a discontinued operation. We used the latest numbers when computing the financial metrics listed below.
| Cash Management | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Current Ratio | 0.9 | 0.9 | 0.7 | 0.9 |
| LTD/Equity | 32.4% | 33.5% | 31.7% | 41.9% |
| Debt/CFO (years) | 1.8 | 2.2 | 3.1 | 2.8 |
| Inventory/CGS (days) | 71.7 | 75.4 | 75.3 | 69.6 |
| Finished Goods/Inventory | 64.6% | 66.6% | 65.0% | 66.5% |
| Days of Sales Outstanding (days) | 29.8 | 30.8 | 32.2 | 30.6 |
| Working Capital/Revenue | -9.8% | -12.9% | -10.3% | -5.4% |
| Cash Conversion Cycle Time (days) | 46.0 | 49.3 | 57.3 | 52.9 |
| Gauge Score (0 to 25) | 15 | 11 | 5 | 5 |
Since late 2006, P&G has had a lot of short-term debt, such as commercial paper, on its Balance Sheet.
This inflated the company's Current Liabilities, pushed its Current Ratio below 1.0 and turned Working Capital negative. For a blue-chip, creditworthy company, this situation is not as worrisome as it might be for a smaller firm with less access to the credit markets.There is now, however, an indication that P&G might be easing its reliance on short-term financing. Debt due within one year was between $12 billion and $22 billion at the end of every quarter between December 2006 and September 2009. However, Short-term debt obligations were reduced to $7.8 billion at the end of December 2009.
Long-term debt, now $22.3 billion, did not change appreciably, nor did Cash and equivalents. It would appear that P&G chose to use funds from the pharmaceuticals divestiture to pay off short-term debt. The reduction in total Debt, short- and long-term, is also seen in the reduced period of Cash Flow from Operations, now 1.8 years, that would be required to repay the debt.
A reduction in the Inventory level and the Finished Goods proportion also helped the Cash Management gauge score in the recent quarter.
| Growth | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Revenue growth | -4.5% | -6.8% | 3.7% | 6.2% |
| Revenue/Assets | 56.1% | 54.1% | 56.9% | 56.7% |
| Operating Profit growth | 5.2% | 5.4% | 15.1% | 11.3% |
| CFO growth | 26.2% | 5.3% | -10.1% | 18.9% |
| Net Income growth | -3.1% | -8.0% | 5.2% | 15.8% |
| Gauge Score (0 to 25) | 6 | 3 | 6 | 8 |
The Growth metrics for this consumer products company have undoubtedly been affected by slower economic conditions worldwide. Product divestitures have also made the company smaller.
The gauge score received a small lift from the big increase in the Cash Flow from Operations. However, the bulk of the increase can be attributed to changes in Working Capital and one-time gains.
| Profitability | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Operating Expenses/Revenue | 79.1% | 79.6% | 80.3% | 80.1% |
| ROIC | 12.0% | 11.6% | 12.2% | 11.8% |
| Free Cash Flow/Invested Capital | 14.5% | 13.2% | 10.4% | 11.7% |
| Accrual Ratio | -3.0% | -0.2% | 2.0% | -0.6% |
| Gauge Score (0 to 25) | 11 | 8 | 7 | 8 |
Operating Expenses during the last year as a percentage of Revenue for the year were more than a percentage point lower than during the previous year, improving profitability.
Free Cash Flow as a percentage of Invested Capital has improved substantially, and the Return on Invested Capital has been stable.
The decrease in the Accrual Ratio is also a positive development, signaling better earnings quality.
| Value | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| P/E | 14.5 | 13.4 | 13.9 | 19.5 |
| P/E vs. S&P 500 P/E | 0.8 | 0.6 | 0.7 | 1.1 |
| PEG | 2.8 | 2.5 | 0.9 | 1.2 |
| Price/Revenue | 2.5 | 2.4 | 2.4 | 2.7 |
| Enterprise Value/Cash Flow (EV/CFO) | 12.6 | 13.1 | 17.1 | 18.6 |
| Gauge Score (0 to 25) | 13 | 16 | 13 | 7 |
| Share Price ($) | $60.63 | $57.92 | $61.82 | - |
The P/E multiple expanded slightly on lower earnings and a share price that ended the year not much different from the price at the start.
A higher PEG value also worked against the gauge score. However, this downward pressure was partially offset by the lower EV/CFO.
| Overall | 31 Dec 2009 | 30 Sep 2009 | 31 Dec 2008 | 5-Yr Avg |
| Gauge Score (0 to 100) | 48 | 45 | 36 | 29 |
The Cash Management, Growth, and Profitability gauges each inched up. These increases were able to overcome a 3-point drop in the contrarian, but double-weighted Value gauge.
Full disclosure: No position in PG at time of writing.
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Nice to see you use an example to explain the theory. This is where a lot of sites go wrong but it is clear here.
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