Jawboning the Street

6…12…5

Such are the number of times Procter & Gamble management—first the CFO, then the Treasurer, and then again the CFO—used the word “strong” during their discussion of first quarter earnings yesterday.

That’s a total of 23 times the word “strong” was used even before the question and answer session started.

During the Q&A that followed, in fact, management used the word another 17 times.

Total usage of the adjective “strong” during the P&G conference call: 40 times. That’s got to be some kind of record.

In and of itself, the use of an adjective such as “strong” is meaningless. Who cares if management chooses to say “strong growth” and “strong business momentum” and “very strong top and bottom line results,” as the P&G Treasurer did in three successive paragraphs? When a company has “strong” results and chooses to call them “strong,” that’s their right.

But as I have learned watching other companies over the years, “meaningless adjectives” can be employed in all kinds of ways to defuse, defer and decoy the numbers—and therefore deny reality—until it is too late to deal with the underlying problems.

If any company had the right to use the word “strong” in a recent conference call, it was Google. Google’s growth, both sequential and year-over-year, stayed astonishingly high, and margins didn’t budge—leading to a net earnings number that beat Wall Street’s expectations by a full 20c a share.

Yet Google management used word “strong” exactly twice in the management discussion.

Procter & Gamble, it should be noted, “beat the number” by precisely one penny, and used the word 23 times in the management discussion.

(For the record, P&G did not actually beat the number by a full penny. According to a sharp-eyed reader of this blog, “The reported number was $0.7657, which if it had been 0.0008 less would be be rounded down to $0.76, rather than up to $0.77…about $2 million on a quarterly expense structure of $12 billion.”)

But P&G management went further than deliberately infuse the adjective “strong” into their “upbeat” presentation. CFO Clayt Daley devoted the final part of his introductory discussion to a Lyndon Johnson-style in-your-face jawboning effort for a higher P/E ratio:

Now I want to conclude by providing some perspective on our price-earnings ratio. We have received a number of questions recently on this topic. We believe there are some important factors that investors should keep in mind when evaluating P&G’s P/E multiple both versus history and versus peers.

After noting P&G’s broad product portfolio, expensing of stock options, near-term dilution from the Gillette acquisition and one-time charges, Daley concluded the P/E lobbying effort as follows:

We believe that a simple P/E comparison does not fully capture the fact that P&G is a very different company today than it was five or 10 years ago. P&G has a much different organization structure that allows the global business units to focus on their consumers and competitors while capturing the scale benefits not available to competition.

Additionally P&G has a much stronger portfolio of businesses, a more diverse geographic mix and a significant opportunity to build shareholder value with Gillette, and we are confident that we will be able to deliver our new top and bottom line targets through the end of the decade.

(Notice he got in another “strong” there!)

Forgive my cynicism here, but most of the times I’ve heard a company baldly lobby for a higher P/E ratio, it’s a management team consisting of two guys in an office suite off Route 101 in Burlingame trying desperately to get whatever half-baked small-cap start-up they’ve put their life savings into lumped together with whatever hot new technology is firing investors’ imaginations at the moment—not the highly regarded heads of one of the oldest and most durable consumer products companies in the world.

Happily, I can report, Wall Street’s Finest did not entirely roll over to have its collective belly scratched by the firm, guiding hand of Mr. Daley.

Deutsche Bank Analyst Bill Schmitz, for one, asked the obvious question:

You sort of gave us a little lecture on valuation and why the P/E is too low. Why wouldn’t you just accelerate your share repurchase then if you thought that the multiple was too low now? You still have considerable flexibility in terms of repurchase…

To which CFO Clayt Daley said:

“I’m buying as much stock as I’m allowed to buy.”

For the record, P&G’s shares outstanding dropped by not quite 40 million in the quarter, on a 2.7 billion fully-diluted share base.

So why the jawboning? Why the use of the adjective “strong” forty times during an hour long conference call? Why not just take the company private if it’s so darn cheap?

The answer to that lies, I believe, in the guts of yesterday’s conference call, in which management outlined not only the “strong” results, but also numerous headwinds facing a consumer products company that just completed its largest consumer products acquisition ever, at a time when the Federal Reserve seems intent on slowing down the buying habits of those very same consumers to which Procter & Gamble sells diapers, coffee, liquid Tide and now Gillette razors.

Chris, I would just say two quick things. One and the most important one is, when we go into periods like this where there are big increases in energy pricing, especially gasoline, there are consumer households whose budget is stretched. Okay? And one of the typical reactions that you see from retailers is to begin to push their private-label brands. We’ve seen this happen in the ’70s during the oil shock. It has happened in every mild or severe recession since.

So I think we’re seeing a normal pattern. Frankly, I’m not — there the manufacturers of private-label diapers are seeing all the same energy and raw material and packing material price pressures that we are that are operating on much thinner margins than the branded competitors. And in the past, some of them have driven themselves into bankruptcy because the margins got squeezed so severely.

No wonder the management jawboned. LBJ would have been proud.

Jeff Matthews
I Am Not Making This Up

Updated 11/5/05

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.