Thursday, May 28, 2009

The Market Gambles as P&G Stock Rises on Bad News

From Reuters: UPDATE 3-P&G forecast below estimates as it spends on growth:

. . P&G said it expects earnings of $3.65 to $3.80 per share for fiscal 2010, which starts in July, and net sales ranging from down 2 percent to up 1 percent.

Analysts on average expected fiscal 2010 earnings of $3.92 per share, according to Reuters Estimates.

BMO Capital Markets analyst Connie Maneaty recommended buying P&G shares on any weakness resulting from the outlook as she sees the company's fundamentals improving over the next year.

"We expected P&G to offer an outlook that pointed to heavy investment to recoup share losses, especially in detergents, and accelerate the investment in faster-growth international markets," Maneaty wrote in a note to clients. "We believe today's news represents a solid buy-point."

P&G stock was already up 20% from its low. It now sells for about 14X year-ahead earnings with no sales growth projected. It has immense gross margins and could cut prices as much as it wants, but its mantra is inflation. It has a large negative net working capital position and a larger negative tangible net worth. Yet the stock is up a bit as the cheerleaders in the financial community tell the public that all was priced in. "PG" will clean up in China, we are supposed to believe (that's a pun on "clean").

In a rational market, one that is evenly poised between optimism and pessimism, news of this sort from a supposedly recession-resistant company should bring out sellers.

3 months ago, consensus earnings estimates for PG for the current fiscal year were $4.26; now they are $4.23. Far worse by normal yardsticks, the next-year's earnings estimates for the next year were $4.11, and now they are lower by a massive 10% or so. A steady Eddie company such as P&G just does not do this.

Worse, PG is a dividend stock. While the payout was increased 10%, competing yields from safety-conscious come from Treasuries, which have increased their payout far more.

Other evidence of strange market behavior comes from the near-doubling of oil prices in the last several months being greeted as good news. The collapse in oil prices was the only truly good thing that came out of the economic collapse. The rapid rise in oil prices, which consumers have noted when buying gasoline, is horrible news for a fragile U. S., Western and Japanese economic structure.

Let's be optimistic, but realistic. The stock market is a bit more optimistic than I like.

Time will tell.

Copyright (C) Long Lake LLC 2009

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