P&G rates a `buy' after swallowing Gillette

Taking Stock

Your Money

October 16, 2005|By ANDREW LECKEY | ANDREW LECKEY,TRIBUNE MEDIA SERVICES

Procter & Gamble Co. has been a big part of my retirement account for quite some time. Should I continue on with it?

- J.D., via the Internet

One way of looking at it is that Procter & Gamble is now the proud owner of Gillette Co.'s new five-blade razor, the Fusion.

But there's obviously more to it than that:

P&G's recently completed $57 billion acquisition of Gillette marries a giant in detergent, beauty aids and toothpaste with a leader in razors and batteries. The resulting global consumer-products company wields awesome marketing and distribution power.

To accommodate antitrust regulators, P&G is divesting itself of its SpinBrush electric toothbrush brand in a $75 million sale to Church & Dwight Co., maker of Pepsodent.

Despite the size of this merged P&G and Gillette, however, the company still must cope with escalating prices for the raw materials required in its businesses. Its tactic thus far has been to cut costs and raise prices.

In addition, the company projects the deal to reduce earnings 20 cents to 26 cents a share in its fiscal year that ends in June, and by 12 cents to 18 cents in fiscal 2007.

The impetus behind the deal is a projected cost savings of $1 billion to $1.2 billion and increase in annual sales of $750 million by 2008.

Shares of Procter & Gamble (PG) are up 2 percent this year after gains of 10 percent last year and 16 percent in 2003.

There is some skepticism on Wall Street about how well the combination will function. The market share of Clairol, for example, has declined since its purchase by P&G for $4.95 billion in 2001.

Both P&G and Gillette have been benefiting from increased sales in developing nations, a trend expected to accelerate. P&G earnings have risen on sales in beauty aids, fabric, health and home-care products, while Gillette has seen gains across its razors, batteries and oral-care segments.

The stock of P&G receives a consensus "buy" recommendation from the analysts who track it, according to Thomson Financial. That consists of five "strong buys," five "buys" and seven "holds."

Earnings are expected to increase 11 percent this year versus a 21 percent forecast for the cleaning products industry, according to Thomson Financial. Next year's projected 10 percent increase compares to 13 percent expected industrywide.

P&G's five-year annualized earnings forecast of 11 percent is slightly less than the 12 percent expected for its peers.

Andrew Leckey writes for Tribune Media Services.

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