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Procter & Gamble: Consumer Goods Giant

07/19/05 01:46:35 PM
by Paolo Pezzutti

Prices are in a trading range, but expectations are positive.

Security:   N/A
Position:   N/A

Procter & Gamble manufactures and markets a very long list of consumer products, from cleaning products and snacks to health and beauty aids Famous brands include an extensive catalogue of products in laundry, dish, and fabric care; hard surface cleaners and paper products like towels, tissues, diapers, and baby wipes; cosmetics, deodorants, fragrances, hair and skin care, and other personal and beauty products; oral care, pharmaceuticals, nutrition aids, and even pet health products; and coffee, snacks, juice, peanut butter, shortening, and oil. The company has 110,000 employees and a market capitalization of about $136 billion USD.

The press recently reported that the European Commission approved Procter & Gamble's $57 billion acquisition of Gillette, after the agreement to sell its Crest battery-powered toothbrush business. The merger will create a consumer goods giant with more than $65 billion in annual sales, the world's largest consumer goods company. Of course, the deal is subject to approval by other antitrust regulators, particularly the Federal Trade Commission. Shareholders of both companies already approved the merger last Tuesday. Few of the two companies' products overlap, with the exception of the electric toothbrush business. P&G will sell its Crest SpinBrush division and retain Gillette's Oral-B brand. The deal will combine, under Procter & Gamble, some of the best-known brand names in the health and beauty business. Gillette will become a business unit, with brands such as Braun, Oral-B, and Duracell batteries. It seems that the deal would result in the loss of 6,000 jobs worldwide out of a combined 140,000 positions at the two companies.

Figure 1. The PG monthly chart displays the uptrend started in 2000. The stock is near its all-time highs.
Graphic provided by: BigCharts.com.
 
To examine the technical situation of the stock, Figure 1 shows the monthly chart. In 2000, the stock went down quickly from almost $59 to a low of about $26, in less than three months. From that low, prices recovered steadily to the present $55 level, very close to the all-time highs of the stock. Prices are now congested with Bollinger Bands still closing.

Figure 2. The weekly chart prints a sideway movement that started last year. The stochastic gave effective buy signals throughout the period.
Graphic provided by: BigCharts.com.
 
In Figure 2, you can see a weekly chart of the past years. Prices moved from about $30 in 2000 to the present $55 -- a steady, although not skyrocketing growth, which alternated consolidations and trend accelerations throughout the years. The stock is now in a trading range, moving sideways since mid 2004, and oscillating between $51 and $57. Note that the stochastic oscillator has successfully spotted buying opportunities, when oversold. From the value of $20, it has now turned up, crossing its moving average and giving a buy signal. Bollinger Bands are perfectly parallel and flat, indicating an ongoing typical trading range environment.

Figure 3. The daily chart displays a trading range environment. The last relative low was printed at the beginning of July.
Graphic provided by: BigCharts.com.
 
In Figure 3, you can see the daily chart of the company. Note the trading range environment that has characterized the stock during the past year. Prices at the beginning of July reached the support of 52 with the stochastic printing a positive divergence. Interestingly, a gap-up marked the beginning of a positive leg towards resistance of the trading range. The stochastic is now overbought at a level of 80. The next short term consolidation could provide a low risk entry point.

Although there might be a temporary profit slowdown, in the medium term, the creation of a consumer goods giant company has a chance to improve its presence in the consumer market and ultimately benefit from the merger. Technically, the stock is in a stable long-term uptrend. The sideways movement started in 2004 should represent a pause before resuming the up movement. In the short term, looking for low risk entry points on supports could be a viable strategy.




Paolo Pezzutti

He is the author of the book "Trading the US Markets - A Comprehensive Guide to US Markets for International Traders and Investors" - Harriman House (July 2008)

Rome, Italy
E-mail address: pezzutti.paolo@tiscali.it

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