P&G Still Steady after Bad Publicity (PG)

By: Joshua Caucutt, dated May 18th, 2010

Procter & Gamble (PG)

Last week, through no fault of its own, Proctor and Gamble (PG: Charts, News, Offers) found itself at the center of one of the most remarkable trading stories of the year when the stock price plunged from the $62 range down to under $40 and then back up again in less than half an hour. Thousands of other stocks were affected during the market plunge and SEC chairwoman, Mary Schapiro called the event “unacceptable”. The resulting investigation resulted in the cancellation of many of the trades, unfortunately, Proctor and Gamble was not included in the list of reversals.

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Stock Analysis

To many people, Proctor and Gamble means “toothpaste”. The reality is that this global company produces almost everything that you might find in your kitchen or bathroom. P and G products range from detergent to snacks, from paper products to batteries, from pet food to razors and deodorant. As a result, investors have historically found this company to be attractive due to the diversity of practical products and geographical reach. Proctor and Gamble reported net income of $13.4 billion on revenue of $79 billion in 2009.

The stock price nosedive story is not the only isolated incident to affect Proctor and Gamble in recent weeks. There was also the “mommy blogger” story where a small number of parents used blogs and social media to spread the accusation that new Dry Max diapers were causing skin rashes and chemical burns. Official statements from Proctor and Gamble indicate that the issue has been investigated and that there are no problems with the Dry Max. The U.S. Consumer Product Safety Commission has opened a third party investigation to make certain of P and G’s claims and a class-action lawsuit has been filed. The resolution of the problem is almost irrelevant because the marketing damage has already been done.

To make matters more difficult for Proctor and Gamble, Berkshire-Hathaway (BRK.A: Charts, News, Offers) chairman, Warren Buffet has been steadily selling P and G throughout the last two quarters. The company sold off 8,812,599 shares or 9.1% of P and G holdings during the fourth quarter of 2010. During 1Q of this year, Berkshire sold another 8,406,627 shares, further reducing the company’s stake by over nine and a half percent. To Proctor and Gamble’s credit, Buffet stated that Proctor and Gamble in the list of companies that he would have “preferred to keep” for the long haul and was clear that his selling of PG was for the purpose of raising cash for the now completed $26 billion acquisition of the freight railroad, Burlington Northern Santa Fe Corporation. The railway is now known as Berkshire Hathaway Santa Fe.

Moving forward, P and G has set its sights on developing new products, spending almost $2 billion on research and development in 2009 and announcing that a “flurry” of new products will be rolled out in 2010. Furthermore, while P and G is a dominant player in the domestic household market, the company sees so-called emerging markets as the area that shows the greatest promise for expansion. Emerging markets are creating new consumers for P and G products as well as an employee base. P and G plans to open 20 new manufacturing plants over the next four years and most of them will be located in emerging markets.

The bottom line is that Proctor and Gamble is a good company, despite their recent run of unfortunate news stories. They make sound products at reasonable prices and these products happen to be items that most of us would not choose to live without – even when money gets tight.

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