PG Preview: Currency, Commodities and the Consumer

Procter & Gamble (PG - commentary - Cramer's Take) is scheduled to report first-quarter 2009 earnings before the bell on Wednesday morning, and consensus analyst expectations are for 98 cents in EPS and $21.87 billion in revenue, for year-over-year growth of 6.5% and 8%, respectively.

Remarkably, on the fourth-quarter 2008 earnings call, management doubled its expected rate of inflation for fiscal 2009 and stated that the price pressures and the resulting impact on gross margins would be felt most severely in the first quarter of 2009. Commodity pricing pressure cost Procter & Gamble about 150 basis points of gross margin in fourth quarter 2008. Obviously, "inflationary expectations" have changed just a bit in just the last 90 days, and thus I wonder how it will impact both first quarter and full year 2009 from an operating perspective.

In fourth quarter 2008 (ended June 30), Procter & Gamble guided for $3 billion in inflation in fiscal 2009, doubling the $1.5 billion in fiscal 2008. For the first quarter of 2009, management expects sales growth of 4% to 6%, gross-margin contraction of 250 to 300 basis points (thanks to commodity costs), operating-margin contraction of 140 basis points, and EPS of 98 cents to $1.00.

To conclude, if the 98-cents-to-$1.00 range in EPS is met in the first quarter, Procter & Gamble will be trading at 17 times 12-month trailing estimates, with expected growth of 15% in fiscal 2009. The company is really a mid-single-digit "organic grower" (ex-currency) with a stable and consistent earnings stream. Procter & Gamble is also a prodigious cash flow and free cash generator, generating almost $5 a share in cash flow and about half that in free cash flow over the trailing four quarters.

It will be interesting to hear management's comments and guidance about the three C's: currency, commodities and, ultimately, the consumer (excluding the U.S.). While a stronger dollar and a penny-pinching consumer are potential negatives, sharply lower commodity costs and higher margins are one big positive.

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At the time of publication, Gilmartin was long Procter & Gamble (small position in one account), although positions may change at any time.

Brian Gilmartin, CFA, founded Trinity Asset Management (TAM) in 1995, where he is currently a portfolio manager. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gilmartin appreciates your feedback; click here to send him an email.