Economic health
The Procter & Gamble Company (NYSE:PG)’s stock price has risen 17% so far this year. This is a great return on the stock for a company that has had a slight decline in net income over the last few years. The earnings decline is due to an increase in overall expenses.
Despite the increase in expenses, the company still has a strong gross margin of 49% and operating margin of 17%. Its return on equity is over 17%, as well.
Johnson & Johnson (NYSE:JNJ), one of its rivals, has higher margins with a gross margin of 67% and operating margin of 18.94%. The company has witnessed a dip in earnings over the last few years, but in 2011 and 2012, net income rose steadily.
The outlook for Johnson & Johnson (NYSE:JNJ) is very strong. Analysts expect top line growth of 5%-6%, reaching $70 billion in 2013. Earnings are expected to grow at a slightly higher rate in the next year. Because Johnson & Johnson (NYSE:JNJ) provides more than just consumer products, it will benefit from the increased need of new pharmaceuticals to combat cancer, HIV, and other chronic diseases.
Investor sentiment
Institutional investors have been increasing their positions in P&G. This is a great sign for investors as they are selecting a new stock or confirming a current position. In the first quarter of this year, Fidelity Contrafund initiated a position in P&G. In addition to this new position, two other funds have increased their positions.
The Fidelity Balanced Fund increased its P&G position by 2%. Fidelity’s Magellan Fund increased its position by almost 50%.
Eight Wall street analysts have a buy rating on P&G and 13 have a hold rating.
These are all strong signs for investors. New funds are purchasing this stock, current funds are increasing their positions, and analysts are telling people to pay attention to The Procter & Gamble Company (NYSE:PG).
Customer growth
One customer makes up 17% of all of P&G’s revenue. Having such concentrated revenue is sometimes a risk for a company. However, in this case, it looks like a good thing. This one customer is Wal-Mart Stores, Inc. (NYSE:WMT).
Wal-Mart Stores, Inc. (NYSE:WMT) has witnessed strong growth in the last few years. In the last five years, the company’s net income has grown an impressive 27%. It has plenty of plans to continue this growth in the future.
Wal-Mart Stores, Inc. (NYSE:WMT) is renovating and updating a lot of its stores. It is adding self-check out lines to expedite customers coming in and out of the store. It is also allowing customers to purchase items online and pick them up in stores. Because of this, Wall Street analysts are expecting a 6% growth in net income next year.
As Wal-Mart Stores, Inc. (NYSE:WMT) continues to grow, its relationship with The Procter & Gamble Company (NYSE:PG) has the potential to grow as well.
Final thoughts
The Procter & Gamble Company (NYSE:PG) has strong margins and return on equity. It isn’t as strong as Johnson & Johnson (NYSE:JNJ), but that is because it focuses on consumer products and not big pharma. Just because another competitor has a stronger income statement, it doesn’t mean The Procter & Gamble Company (NYSE:PG) isn’t strong.
Institutional investors are increasing their positions, and its largest customer is continuing to grow. These are all great signs for investors.
The article Why You Should Buy This Blue Chip Stock originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
