Betting on Procter & Gamble
Apr. 24, 2000

The news from Procter & Gamble in the recent past had been of a decidedly cheerless sort. Early in March, they dropped a bombshell when they announced that their earnings would fall short of analysts' forecasts. Rising raw material prices and intense industry competition were cited as the culprits, and jittery investors drove down the stock a whopping 31 percent. The fall hit P&G employees especially hard: About 20 percent of P&G's stock is owned in an Employee Stock Option Plan (ESOP) by employees.

The magnitude of the decline in the stock of the consumer-products behemoth was stunning. Huge, diversified, multinational corporations operating in unexciting businesses like tissue and shampoo are not supposed to experience such drastic fluctuations in their stock prices. A fall of 31% in the stock of a fledgling dot-com company with losses stretching into the horizon would hardly raise an eyebrow these days, but for a solid, profitable, "Old Economy" warhorse to fall like this -- it was unthinkable.

But unmet expectations now exact a steep price. Nervous investors, having bid up most stock prices merely on the whiff of anticipated earnings, turn tail at the slightest sign of being proved wrong. The margin for error is exceedingly thin, as many traders have discovered to their consternation in recent weeks.

During the last year, the stock price for P&G had reached a high of $118; after the mayhem of a few weeks ago (March Madness?), it now trades in the low 60s. It's enough to make a day trader pull out his well-shampooed hair.

But most individual P&G stock holders, one suspects, are made of sterner stuff. The company's retirees and employees, who tend to have sizeable holdings of the stock, are not the sort who buy and sell shares at the drop of a hat. Unlike their speculative brethren in the dot-com trading world, P&G shareholders tend to buy -- and hold. For a long, long time. Short-term fluctuations are minor annoyances; stable earnings growth in the long run is what will bring home the bacon.

The Ides of March have come and gone. The news from Procter & Gamble has since acquired a distinctively cheerful tenor. They have received FDA approval for their osteporosis drug. And, in a sign that the company views its long-run prospects as essentially sound, they have announced plans to expand their operations.

In a Press-Gazette article on Apr. 23rd ("Expansion set for local P&G plant"), Nathan Phelps reported that Procter & Gamble has decided to invest between $50 million and $100 million in additional plant space and new employees at its two Green Bay sites.

Why Green Bay ?

Turns out that the P&G employees here have raised their productivity sharply in recent months, and that played a major role in the decision by the Cincinnati-based company to expand its operations in Green Bay . The gains in productivity were primarily attributed to increased versatility of the labor force: employees who used to specialize in certain tasks are now adept at handling several duties.

The reputation enjoyed by P&G in the area is such that they anticipate no difficulty in hiring additional workers. In a county where unemployment hovers around the 2% mark, and other firms scramble to find workers, this is no mean feat. P&G shareholders are not unaware of the salutary effects of a congenial labor force. Contented workers tend to be more productive, which in turn tends to boost profits. If P&G's Green Bay operation is any indication, its stock is unlikely to remain in the doldrums for long.

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