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Tuesday, November 07, 2006

Analyzing Procter & Gamble (PG)

By Yaser Anwar CSC of Equity Investment Ideas

Last year when P&G bought Gillette, management said they "expect the transaction to be dilutive to earnings in the first two years," so far even with the dilution the company just reported very good numbers ahead of the street today and raised guidance further.

Management is on track to "derive $14 billion to $16 billion in synergies from this combination over time," as they had said during a press conference in Oct. 2005. This is clearly evident in their numbers today, "Profit margin expanded during the quarter as sales growth, cost-cutting initiatives and the benefit of adding the higher-margin Gillette business more than offset acquisition-related expenses and higher commodity costs." (Source: WSJ)

A great company like P&G attracts great institutional investors. Warren Buffet's Berkshire Hathaway owns upto 3.5% of their outstanding share float. It's always nice to see WB on the side of shareholders.

One of the areas where growth for P&G will come is developing countries, where it has 23% of the market share. This should also reduce it's exposure to the unfavorable dollar outlook vs the Euro and Yen. Another positive about P&G is it's high ROIC, about 24%.

The falling energy and raw material prices should further help the company in it's 4th Q as management acknowledged them as culprits in P&G's rising expenses. On the positive side of this, the strong brand helps P&G, as it can raise prices.

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