What Procter & Gamble’s Brand Downsizing Means for Your Portfolio [The Procter & Gamble Company(NYSE:PG)]

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August 11, 2014 2:43pm NYSE:KXI NYSE:VDC

procterandgambleSpring cleaning came around late this year for The Procter & Gamble Company(NYSE:PG). On August 1, the company announced it would clean house by striking as many as 100 brands from the


roster.

Since its founding in 1837, the company has amassed sales of $84.7 billion and an income of $10.94 billion. Chief executive A.G. Lafley says the focus will shift to the company’s remaining brands. Together, they account for about 90% of Procter & Gamble’s sales and 95% of the profits.

Thanks to clever timing (Procter & Gamble also announced a profit of $11.6 billion for its fiscal year on Friday), it looks like investors are on board as well. Stocks shot up 3% to $79.65 following the report.

Analysts say the brand downsizing is designed to lighten the company while lighting a fire under the firm’s stock price. It has stagnated over the past year.

The cuts mean fewer brands to choose from, but many of the brands are so obscure, consumers might not know what’s missing. Although the company hasn’t announced the exact brands to be axed, analysts already have predictions.

For example, the woefully underexposed children’s oral care brand, Zooth, or the Trojan line of laundry detergent sold in Southeast Asia. In fact, American consumers may scarcely notice a difference at the supermarket.

After all, only 25 of Procter & Gamble’s brands break the $1 billion mark in sales every year. So the real question is, how will this affect investors?

Overstretched and Underperforming

Although the move will hack Procter & Gamble’s portfolio nearly in half, most brands were little more than dead weight. Thus, the company’s decision to drop them has carried over as a sense of proactivity in the eyes of analysts.

Lately the company has struggled to connect with consumers of its beauty products. Some analysts, predict that Procter & Gamble plans to eliminate a handful of brands within that category.

Maybe that’s why streamlining Procter & Gamble’s ops has been a priority for Lafley and his return to the CEO position in 2013 following a successful nine-year foray from 2000 to 2009. Lafley reclaimed the position from former CEO Bob McDonald, who investors ousted in the wake of four years of shaky growth.

Almost immediately, Lafley starting eliminating brands. For $2.9 billion, he sold Procter & Gamble’s Eukanuba and Iams pet food brands to Mars Incorporated.

Analysts say Procter & Gamble has been under pressure to increase sales in an economy with even more value-conscious consumers. Despite the tight market, the company’s net income rose to $11.6 billion from $11.3 billion last year.

The Path to Profitability

Put simply, the road to reinvestment with winning brands will be littered with Procter & Gamble’s underperforming brands.

“In an ideal world, we would’ve done this at the depth of the financial crisis, in the recession,” Lafley said in a conference call with analysts. “Having said that, I don’t see any reason to wait. I don’t see any virtue in waiting another minute.”

Procter & Gamble investors should hold on to their stock, while others can buy in for the affordable price of $79.41. Currently, the company’s market cap is $214.88 billion while income growth is 23.40%.

Some brands may be finished as far as Procter & Gamble is concerned, but analysts report that private firms are rallying at the chance to buy up displaced Procter & Gamble brands. In doing so, Procter & Gamble may be able to reinvest that money into products for its top brands, including Crest.

You may even have a few bucks left over to spend on one of Procter & Gamble’s most innovative developments, Sensi-Stop Strips, which stick to teeth for quick relief. So far, there’s no word on strips for relieving poor investment decisions (maybe next quarter).

by Tom Sandford

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

 


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