Procter & Gamble Exits Pet Care, But Investors Are Still Unimpressed

Source: Thinkstock

Source: Thinkstock

Consumer giant Procter & Gamble (NYSE:PG) announced on Wednesday that Mars, Inc. has agreed to buy the Iams, Eukanuba, and Natura pet supplies brands in major markets for $2.9 billion in cash. The markets — North America, Latin America, and some others outside of Europe — represent about 80 percent of Procter & Gamble’s Pet Care business’s global sales. The brands will join a portfolio at Mars that already includes Pedigree, Whiska, Banfield, and Royal Canin.

The news did little to move Procter & Gamble stock on Wednesday and may have even weighed on investor sentiment. Shares closed the day up just 0.17 percent, trailing a 1.11 percent increase in the Dow Jones Industrials and a 1.09 percent increase in the S&P 500 index. Procter & Gamble Chief Executive Officer Alan G. Lafley framed the sale — an exit from the pet care industry — as an “important step in our strategy to focus P&G’s portfolio on the core businesses where we can create the most value for consumers and shareowners,” but investors appeared hesitant to accept that “the transaction creates value for P&G shareowners,” as Lafley argued.

Procter & Gamble will begin reporting results from the sold pet care business as discontinued operations beginning in the second quarter. The impact of the divesture is not expected to be significant, and the fiscal 2014 core earnings growth forecast is unchanged at 3 to 5 percent.

However, this growth forecast is already down from a range of 5 to 7 percent. Procter & Gamble downwardly revised its estimate in February after it became obvious that foreign exchange would remain a significant headwind moving through the first half of the year and possibly beyond.

Procter & Gamble isn’t the only consumer giant negotiating challenging and erratic headwinds, both in the U.S. market and in increasingly important emerging markets all around the world. While the U.S. dollar is expected to make steady gains against major currencies this year as the economy improves and causes the Federal Reserve to back off on its stimulus program, the situation of suffering emerging market currencies will likely be much different, and may force many global companies to focus on foreign currency exposure and raise prices frequently. Moreover, the expectation of higher interest rates has prompted the evacuation of investment dollars from many emerging markets.

But Procter & Gamble appears to be the consumer giant struggling the most against the headwinds. Compared to competitors like Johnson & Johnson (NYSE:JNJ) and Kimberly-Clark Corp. (NYSE:KMB), Procter & Gamble has has had a fairly underwhelming year on the stock chart. Shares are up just 2.8 percent year over year compared to a 20.6 percent gain for Johnson & Johnson and a 10.9 percent gain for Kimberly-Clark.

All three companies will report earnings this month. Analysts are expecting Procter & Gamble to report sales of $20.73 billion, 0.6 percent year-over-year growth, and earnings of $1.02 per share, year-over-year growth of about 3 percent. Analysts are expecting Johnson & Johnson to report sales of $18 billion, up 2.8 percent on the year, and earnings of $1.48 per share, up about 2.8 percent on the year. Kimberly-Clark is expected to post sales of $5.31 billion, down about 0.1 percent on the year, and earnings of $1.47 per share, down about 0.7 percent on the year.

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