Zacks Industry Outlook Highlights: Procter & Gamble, Lorillard and Kimberly-Clark

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Dec 08, 2011, 09:30 ET

CHICAGO, Dec. 8, 2011 /PRNewswire/ -- Today, Zacks Equity Research discusses the Consumer Staples, including Procter & Gamble Co. (NYSE: PG), Lorillard, Inc. (NYSE: LO) and Kimberly-Clark Corporation (NYSE: KMB).

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A synopsis of today's Industry Outlook is presented below. The full article can be read at

http://www.zacks.com/stock/news/65910/Consumer+Staples+Stock+Outlook+-+Dec.+2011

Though temporarily impacted by inflation, staples companies are generally flush with cash and have the wherewithal to withstand the current economic headwinds. Procter & Gamble Co. (NYSE: PG) is one of the better-positioned companies in this space, with a strong track record of acquisitions, and despite a soft retail environment, recent volume growth has exceeded expectations. The company generated approximately $9.9 billion in free cash flow in fiscal 2011 - a free cash flow productivity of 84%. The company also repurchased $7 billion worth of shares in fiscal 2011 and increased its quarterly dividend by 9% in April, paying $5.8 billion in dividends to shareholders in fiscal 2011.

Procter & Gamble also continues to see healthy growth rates in developing markets. In fiscal year 2011, the company experienced unit volume increases in all reportable segments due to investments in innovation and market expansions, such as Olay and Head & Shoulders in Brazil, Gillette Guard in India. The results thus led to inflated guidance for net sales and organic sales (based on solid volume momentum, partially offset by product mix and pricing) in the range of 5%–9% and 3%–6%, respectively, for fiscal year 2012.

The first quarter of 2012 also brought innovative premium-priced products in both mature and emerging markets such as Pantene treatments in Asia, Vicks Nature Fusion and Olay Pro-X Clear in North America, fragrances in Prestige such as Gucci Guilty; and market expansions, such as Pampers Super Dry Premium in China, Oral-B in Western Europe, and ProGlide in Asia, which fuelled more than 30% growth in the region.

Procter & Gamble also remains committed to improving the company's position in the faster growing developing markets, which currently represent only 30% of its total sales. The company also believes that the developing market could catch up with the combined value of North America and Europe by the next decade.

However, margins were impacted by higher commodity costs and unfavorable product mix, which resulted in an unanticipated earnings headwind of about 25 cents per share in fiscal 2011 or nearly a 7 percentage point drag on earnings per share growth versus our going-in expectations. Nevertheless, the company's expansion of its portfolio of brands, both through internal development and acquisition remains encouraging. On a long-term basis we are Neutral on the stock, and on a short-term basis the stock has a Zacks #3 Rank which implies a Hold rating.

We can also see better-than-expected third-quarter 2011 results of $1.76 for Lorillard, Inc. (NYSE: LO), as the company continues to outperform in terms of volume and retail shipments, despite difficult macro-economic environment.

Further, the new Newport Non-Menthol launch and the flagship Newport Menthol business continued to improve in the quarter. Despite such launches, Lorillard managed to control its promotional spending.

However, there have been significant increases in cigarette-related taxes which might impact the company's cigarette volume and sales due to lower consumption levels, a shift in sales from manufactured cigarettes to other tobacco products and a shift from the premium price to the mid-price or low-price cigarettes.

In spite of the above difficulties, management continued to return capital to shareholders through share repurchases and dividends. In August 2011, the company's Board approved a new share repurchase program to repurchase up to $750 million of its outstanding common stock. Previously, Lorillard completed repurchases under its $1.4 billion share repurchase program announced on August 20, 2010.

Kimberly-Clark Corporation (NYSE: KMB) is one of the world's leading manufacturers of health and hygiene products, and commands a strong portfolio of well-established brands. In the most recent third quarter 2011, the company's adjusted earnings came in at $1.26 per share, in line with the Zacks Consensus Estimate. However, the adjusted earnings increased 11% from the prior-year earnings on the back of all time high sales growth, cost savings, a lower share count and a reduced tax rate.

However, operating profit declined, as cost inflation more than offset efficiency initiatives. Increasing cost inflation has resulted from the tight supply for raw materials used in the production and strong global demand, particularly in China, though cost inflation has decreased for the full year 2011 to a range of $575 million to $625 million, compared with the previous expectation of $650 million to $750 million, resulting from lower pulp costs. The company has also reduced its 2011 volume estimates for the developed markets due to the current market turmoil.

Nevertheless, Kimberly-Clark's plans to direct its surplus cash flow toward increasing dividends and repurchasing shares. Moreover, Kimberly-Clark is also focusing on reducing cost and improving margin.

These initiatives have led to cost savings of about $240 million in 2009 and about $370 million in 2010. It also led to sales growth and $90 million in cost savings in the third-quarter 2011. Our outlook for the stock remains neutral, supported by the Zacks recommendation as well as the short-term Zacks Rank.

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