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Procter & Gamble: Attention Shoppers

Consumers may pay premium prices for this company's products, but one analyst says its stock is on sale.

Procter Gamble has a knack for making consumers pay premium prices for basic household goods. Do you buy generic laundry soap or Tide? Private label toothpaste or Crest? Brand X batteries or Duracell? Procter Gamble's marketing might protects its brands when rivals slash prices to compete. Now, the company with discount-resistant products is on sale itself, says Morgan Stanley analyst Bill Pecoriello. He calls the stock (symbol PG) a "table pounder" of a buy.

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The shares have fallen 9% since March 13, when PG lowered its earnings forecast for the fiscal year ending June 30 because of lagging orders from Wal-Mart and weaker-than-expected growth in China and Russia. Pecoriello thinks that PG's problems are temporary and that the company's falling out with Wall Street represents a buying opportunity.

Wal-Mart wants to keep its inventory leaner. The move lowers warehousing costs for the world's largest retailer but fouls up suppliers' ability to predict orders. PG was the first Wal-Mart supplier to announce to investors that the giant retailer's inventory strategy was having an impact on profits, says Bank of America analyst April Scee, but it was not the last. Spectrum Brands, a PG rival that, among other things, makes Rayovac batteries, reduced its earnings guidance soon after PG lowered its forecast.

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Regardless of the Wal-Mart development, PG products remain popular. "Procter Gamble continues to gain in most of its important categories," Scee says. "Prices are up, significantly in some cases, and promotional levels have declined."

Sales growth in China and Russia, Scee says, should pick up once PG finishes combining its operations with razor maker Gillette, which it bought last year for $57 billion. The size and scale of the combined company will give it a presence in developing markets that few rivals possess, she says. Pecoriello doesn't see the Chinese consumer slowing down either. "Procter Gamble is one of the best positioned companies in China and we deem any quarterly glitch as just that," says Pecoriello, who visited China last month.

Share of Procter Gamble, recently $56, trade at 21 times the $2.62 per share that analysts expect the company to earn for the year ending June 30, according to Thomson First Call. That's too low, says Pecoriello. His one-year target price is $72.

--Thomas M. Anderson

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