NEW YORK (CNNfn) - Bellwether consumer products maker Procter & Gamble Co., struggling with higher raw material costs and price pressures, warned Tuesday that earnings for the rest of its fiscal year would fall short of Wall Street's expectations, sending its stock - and the Dow Jones industrial average -- tumbling.|
The profit warning comes as the Cincinnati-based maker of Tide detergent, Crest toothpaste and Oil of Olay cosmetics launches a major six-year reorganization plan designed to boost sales and profits, and follows its poorly received attempt two months ago to merge with two drug makers.
P&G stock closed Tuesday at 61-1/2, down 25-15/16, in New York Stock Exchange composite trading, contributing about 142 points to the Dow's 374-point decline. The warning, which was announced early Tuesday morning, also sent shares in P&G's competitors sharply lower, as Wall Street brokerages warned that they see trouble ahead for makers of diapers and soap amid rising costs for raw materials such as pulp and petroleum. Pulp is used in a wide array of paper products while petroleum is an ingredient in detergents, shampoos and packaging.
Procter & Gamble, the largest maker of consumer products in the U.S. and one of the 30 stocks in the Dow industrial average, said earnings per diluted share for the third quarter ending March 31 would total 64 or 65 cents, compared with an estimate of 78 cents predicted by analysts in a survey by earnings tracker First Call Corp. The company made 72 cents in the year-ago quarter.
P&G (PG: Research, Estimates) also expects to earn about 64 or 65 cents per diluted share in its fiscal fourth quarter compared with the consensus estimate of 67 cents.
"We're obviously very disappointed with what happened," P&G CEO Durk Jager told CNNfn's Street Sweep. "We believe this is a temporary setback -- the fundamentals of our business are sound." (329KB WAV)(329KB AIFF)
P&G shares are now trading at their lowest level since April 1997. The stock was the most active U.S. issue, with more than 68.5 million shares traded.
Doubts also hit P&G competitors
After the warning, the stock was hit by a series of downgrades by leading brokerages, including Merrill Lynch & Co., Morgan Stanley Dean Witter, Donaldson Lufkin & Jenrette and J.P. Morgan.
Merrill Lynch also downgraded competitors: Clorox Co. (CLX: Research, Estimates); Dial Corp. (DL: Research, Estimates); and Colgate-Palmolive Co. (CL: Research, Estimates). Each of those stocks was down 6 percent or more in afternoon trading Tuesday. Shares of Unilever (UL: Research, Estimates), the world's largest consumer products manufacturer, fell about 8 percent in London and New York.
"We believe P&G's pre-announcement this morning carries broader fundamental implications for the group, which will likely keep interest in the sector and therefore group valuation muted for the foreseeable future," Merrill Lynch analysts Heather Hay and Scott Johnson wrote in a research report, citing escalating raw material costs and competition in emerging markets.
Just hours after P&G's warning, Colgate issued a statement that it is comfortable with earnings expectations for the quarter and the year, and that a cost-savings program at the company was sparing it the effects of the rise in the cost of raw materials.
Some analysts said the market was overreacting to P&G's disappointing forecast.
Art Hogan of Jefferies and Co. said that some analysts were hoping that P&G was going to announce news of an acquisition during its Tuesday morning conference call, rather than an earnings warning from the normally reliable company. The disappointment prompted part of the sell-off, Hogan said.
"Is this over-done on the downside? I would have to say so," Hogan told CNNfn's In the Money. "Let's face it, the news they gave us wasn't disastrous. It's a clear sign of investor overreaction and just the way these things are being tortured when you fool the analysts." (232KB WAV) (232KB AIFF).
Argus Research analyst, Daniel Peris, also said Wall Street was overreacting, but that investors have grown wary of Jager. Jager took over as chief executive in January 1999 and spearheaded the company's attempt earlier this year to step in as a "white knight" suitor for drug makers Warner Lambert Co. (WLA: Research, Estimates) and American Home Products Corp. (AHP: Research, Estimates), when Warner-Lambert was attempting to ward off an unsolicited takeover from Pfizer Inc.
While P&G said the acquisitions would be a good fit and would help bolster its small pharmaceutical unit, shareholders bolted, sending the stock down as much as 10 percent in one day. P&G backed away, and soon after Pfizer locked up its buyout of Warner-Lambert. Procter & Gamble, which had its biggest acquisition so far in last year's $2 billion purchase of pet food maker Iams, was also reported to be looking at consumer products manufacturer Gillette Co. (G: Research, Estimates).
Jager has "launched a wide range of initiatives, and I think his credibility is beginning to wear thin," Peris said. "The Organization 2005 restructuring ... I think is an excellent program, but adding to that the mega-merger proposals, adding to that launching rapidly, focusing relentlessly on top-line growth and launching all kinds of product initiatives to achieve that top-line growth, they let the cost picture get out of control."
Jager told CNNfn that the company's discussions with Warner-Lambert and American Home lasted only several weeks and involved only a few top executives. "It really should not have any impact on what we face today," he said.
Company defends focus on revenue gains
P&G said revenue growth would be about 7 to 8 percent for the third and fourth quarters, slightly lower than hoped but about twice the growth rate from a year earlier. But the company said higher-than-expected costs for raw materials, higher manufacturing, inventory and logistics costs in Europe, and aggressive competitive pricing in South America was cutting into its profits. The company was also dealt a setback when the U.S. Food and Drug Administration delayed approval of its osteoporosis drug Actonel.
But P&G insisted that it was still on target for 13 to 15 percent annual earnings per share growth and 6 to 8 percent revenue growth starting in the next fiscal year, building on the lower earnings base for the current period.
It said that new products, including a new food wrap called "Impress," and its restructuring plan should encourage that growth, even if it stumbled in its first year.
"Sales growth has been our focus, as it should have been given our past three-year top-line growth rate of about 3 percent," said Clayt Daley, P&G's chief financial officer, in comments to analysts. "Stepping back, had I predicted a year ago that we would achieve 7 to 8 percent growth for this quarter and next, not one of you would have believed me."
"This turnaround has taken investment, both to introduce new brands and to grow existing ones," he added.
Jager said the company remains committed to the Organization 2005 reorganization plan.
"This has been a transition year. Going forward we are going to focus on P&G basics - hard-nosed cost management and commitment to deliver expectations - as well as accelerating sales growth," he said in a statement early Tuesday. "Organization 2005 is absolutely right."