Tags: Horacio R. Marquez

Buy, Sell or Hold: The Procter & Gamble Co. (NYSE: PG) Shows Why a Good Defense is Often the Best Offense

By , Contributing Editor, Money Morning •

In an earnings season that has seen a lot of positive results – as well as a few equally disquieting surprises – it may be a good time to load up on a solid, defensive stock like The Procter & Gamble Co. (NYSE: PG).

In the period between last October and March 29, when the market was gripped by panic-selling and widespread liquidation, we were actively buying the cyclical stocks in energy, other natural resources, and high-technology – essentially the stocks that everybody is very excited about now. 

By doing so we took advantage of low valuations. And as governments around the globe deployed stimulus measures, we enjoyed nice gains on the iShares MSCI Brazil exchange-traded fund (NYSE: EWZ), Diamond Offshore Drilling Inc. (NYSE: DO), Vale SA (NYSE ADR: VALE) and Petroleo Brasileiro SA (NYSE ADR: PBR). 

But since May, I’ve recommended taking profits (for trading-oriented accounts) in most of those pro-cyclical global plays and moving into more “defensive” situations.  I purposely highlight the word defensive, because I believe that on certain occasions these plays actually can become our best offense.

These companies are resistant to recessions because the staples that they sell are necessities that we cannot do without, like toothpaste and soap.  Because of this low sensitivity to general economic activity and low seasonality in general, their cash flows are extremely stable.  This gives them the added advantage of having low, dependable funding, which is a huge advantage when bank and market financing is scarce or comes only at a premium.

There has been nothing said about these companies being up against the ropes with creditors.  In fact, it’s quite the opposite. These companies, in general, generate such strong and even cash aflows that they are able to pay very generous dividends.

So, let’s move into the current earnings season.  While we got out of the way to avoid the negative surprises [like we just saw with Microsoft Corp. (Nasdaq: MSFT) – as evidenced by its stock being down more than 8% in afternoon trading on Friday], many companies were able to beat analyst estimates, thanks to deep cost-cutting. That gave some hope that corporate flexibility once more saved the day. 

But the question is for how long?

We cannot rely on continued cost-cutting measures to beat earnings estimates.  Once a company has cut deeply, it becomes extremely difficult to cut more.  At some point, it needs to start delivering on the top line.  At the same time, the lesson in this earnings season is that China, parts of Asia, and emerging markets are indeed delivering strong growth.

Also, we are seeing increasing evidence that the United States, Europe, and Japan are seeing signs of stabilization – and even a rebound in growth in some browbeaten sectors. 

Hence, I started looking for global companies that can grow strongly in the emerging markets and capitalize on a weak U.S. dollar, but also have enough stable cash flow and critical mass to flourish in a weak U.S. consumer market.

That is how I got to Procter & Gamble. 

This company is the poster child for global marketing. It has more than 20 global brands – each of which exceeds $1 billion in sales.  What’s more, P&G has all the attributes that I described in terms of being recession-resistant, having an impeccably stable cash flow, and low debt levels committed at low interest rates.  More importantly, it is a company on the go.

I recently had a conversation with a top manager of a different global company – a leader in its field. He confessed to me that he believed his own company at times could get complacent.  Sure.  When a company is the leader in its industry, and when few rivals can even dream of competing against it in a range of key products, it is very easy to get complacent. 

But this is not the case at P&G, where the company’s executive management team has been increasing its internal productivity along a number of key variables year after year.

In addition, it just this month elevated an internally bred executive, Robert A. “Bob” McDonald, to the post of chief executive officer. McDonald worked as the company’s chief operating officer under CEO A.G. Lafley, who is now serving as the chairman of the board.

McDonald has the perfect background needed in these times: Exposure to foreign markets, impeccable operational discipline, and solid corporate credentials.  Making logistics happen on a global basis for a company of this magnitude is what is going to pave the way for future profits – but doing so without losing its traditional focus on being a “best-of-breed” marketer and market-share leader in a broad range of consumer-product areas.

Lastly, we are going into P&G before they are due to report earnings next Wednesday (Aug. 5).  If the pattern holds this earnings season, we should be very pleasantly surprised.  Also, we are due to see some rotation out of financials and commodities into consumer staples, many of which have underperformed lately.

I have no complaints about P&G’s valuation of 15 times earnings, which, given the company’s stability and the stock’s 3.2% dividend yield, appears undervalued.

Procter & Gamble closed Friday at $55.84, up 68 cents a share, or 1.23%. At that price, P&G shares are down about 24% from their 52-week high of $73.57, and are up 27% from their 12-month low of $43.53.

Recommendation: Buy The Procter & Gamble Co. (NYSE:PG) at market (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in the The Procter & Gamble Co.

[Editor's Note: Veteran Wall Streeter Horacio Marquez is the author of Money Morning's hugely popular "Buy, Sell or Hold" series, and is also the editor of the longstanding "Money Moves Alert" trading service.

In a new free report, Marquez has identified a category of stocks he has labeled "rocket stocks," which display key characteristics hinting that they're ready to move. One such characteristic: Heavy insider buying. In fact, one particular sector right now is seeing especially heavy insider buying - and many investors will be surprised to discover just what sector it is, and what companies top executives are buying into. For a free report that details these "rocket stock" plays, and that outlines this torrent of insider buying, please click here.]

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