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New Procter & Gamble (NYSE: PG) CEO David Taylor has a tough job. He has taken the reins of a company undergoing a massive transformation. In recent years, many Procter & Gamble brands have experienced slowing growth. The company is weighed down by underperforming brands across several product categories, along with a bloated cost structure.
Procter & Gamble shares have recovered over the course of its year-long restructuring, but it’s still 5% below its 52-week high. P&G’s CEO recently reiterated the company’s commitment to deep cost cuts, but it’s unclear that further cost cuts alone will fix the problem.
Sale: Everything Must Go
Procter & Gamble has already sold off several sluggish brands that have kept the company from growing. Last year, Procter & Gamble sold off 12 beauty brands and its Wella hair care business to Coty (NYSE: COTY) for $12 billion. Before that, it struck a deal to sell its Duracell battery brand to Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) for $3 billion.
These high-profile deals were done as part of a larger productivity initiative, designed to sell off brands that aren’t providing growth to the company, and also to cut significant costs. Four years ago, Procter & Gamble vowed to cut $10 billion in costs from its system. It’s ahead of schedule on that initial target, and looking ahead, Procter & Gamble is doubling down on that effort.
Speaking publicly for the first time since becoming CEO, David Taylor recently stated the company isn’t done with cost-cutting. Not even close: it’s planning another $10 billion round of cuts over the next five years. This sounds like a great idea. After all, P&G’s asset sales and previous cost-cutting initiative put billions of dollars into the company’s pockets, which it has used to buy back stock and resuscitate its sagging stock price.
But analysts and investors aren’t sold on the idea that there is another $10 billion available. The CEO believes that there are still huge cost-cutting opportunities for the company. P&G executives said that this time around, the bulk of the cuts will come from its product pipeline and reduced marketing, not from job cuts. Procter & Gamble has already cut more than 20,000 jobs since 2012.
On top of its earlier asset sales, Procter & Gamble expects to divest a total of 100 brands when it’s all said and done.
Are Procter & Gamble Shares a Buy?
Investors should be pleased that the company is placing a newfound focus on productivity and growth. But whether the stock is an outright buy on this news is less clear. Despite its efforts, Procter & Gamble’s fundamentals have not strengthened in recent quarters.
For example, last quarter the company’s revenue fell 8% year-over-year. To be sure, much of the damage was due to currency fluctuations. The strengthening U.S. dollar has eroded sales growth achieved in international markets.
But even from a core perspective, P&G’s results are still sluggish. The company grew organic sales, which strips out foreign exchange, by just 2% last quarter. And, organic shipment volumes actually fell 2%, indicating the company is still seeing lackluster demand for its products.
This is problematic, as Procter & Gamble shares aren’t exactly cheap. Shares still trade for 27 times earnings, which doesn’t signal that this stock is a screaming buy, especially if its fundamentals continue to stagnate.
Innovation is the part that can’t be fixed by cost cuts. P&G is seeing stiff competition, particularly from private and discount brands. Cost cuts won’t fix this problem. It appears the better fix going forward is product innovation.
Other consumer product giants have excelled at innovation, and the results speak for themselves. Competitor Kimberly-Clark (NYSE: KMB) is an example. Its personal care segment grew organic sales by 7% last quarter. It introduced new product lines related to the diapers brand Huggies, which has taken share from P&G’s Pampers brand.
The key takeaway is that while cost cuts are a good strategy to implement to stem the decline in P&G earnings, they aren’t going to revive sales. In order for P&G to realize a true turnaround, it needs to return to volume growth, and until that happens, the stock isn’t as attractive as rivals like Kimberly-Clark.
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