Solid Story Behind the Headlines

Procter & Gamble (PG) reported its fiscal fourth- quarter earnings this morning, and they were disappointing on the headline numbers, missing earnings expectations by $0.02 ($0.71 versus $0.73 consensus) and undershooting revenue estimates ($18.93 billion versus $19.1 billion consensus).

This comes on the heels of the disappointing Colgate (CL) quarter last week, and the shares are indicated lower at the open. I don't believe the PG quarter is as bad as the headline reads, and it is not the same situation as CL. Colgate lost market share and saw pressure in many of its markets because PG has become a stronger, more competitive opponent. The issue is that the macroeconomic environment remains challenging, and the industry has had to spend more to get the growth. PG remains in turnaround mode, as the new management team continues to invest in new products and geographies. And it's clear that it is working, as the company gained market share again this quarter. In fact, it's gained share in each quarter throughout 2010. I am restricted in this position and will see where the stock settles out over the next few days.

The positives included solid organic sales of 4% (it was at the low end of the company's 4-6% guidance, led by stronger grooming sales, at 12%, offset by weaker fabric/home, which was flat). Volumes grew 8%, with growth in all segments and regions making it the strongest volume gain in 22 quarters, while and taxes were much lower than expected. Also pricing fell just 1% (in line with last quarter and expectations), which means that the company isn't giving away its products with too much promotional activity. Its balance sheet remains very strong, with free cash flow for the fiscal year at $14 billion, or 125% of net earnings. The negative - - and the reason for the earnings miss -- was higher expenses, as overall SG&A costs rose 360bp, operating margins fell 200bp to 15.6% and gross margins rose, but by less than expected, to 49.5%. Mix was also worse than expected at -3% (-2% was expected) on geographic mix, mid- tier product offerings and segment mix.

Guidance for Q1 was mixed, with lower earnings, but higher revenues -- earnings of $0.97-1.01 ($1.04 consensus), 1-3% revenue growth to $20-20.4 billion ($20.26 billion consensus) and organic sales of 3-5% on continued strong volume growth, partially offset by mix and pricing. Fiscal 2011 earnings should be $3.91-4.01 ($3.98 consensus), which is 7-9% higher than the core rate, 2-4% revenue growth of $80.5 billion-82.1 billion ($81.2 billion consensus) and 4- 6% organic sales growth (in line with previous guidance and a big acceleration in the two-year growth rate).

Overall, a disappointing headline, but the story remains a solid one, in my view. Expenses were higher as the company works to build a better company for the long term, investing heavily in brands in faster-growing markets. Over time, this should lead to above-average volume growth and positive operating leverage. Valuation also remains attractive, at 15x forward estimates, below its 19x average.

Marathon (MRO) earnings just hit, beating expectations on the bottom line, at $1.11 versus the $0.81 expectation, on 39% year-over-year revenue growth to $18.57 billion versus $19.69 billion consensus. The earnings beat came from the refining side of the business, which isn't surprising and has been seen across the industry. The call is at 2pm.

Meanwhile, I am going to lock in some of the 15% gain that I have in Prudential (PRU) and sell 300 shares at around $57.50. The company will likely post a solid report tomorrow, I think, led by its international business (recall that its competitor, MetLife (MET) , reported very strong international momentum last week), where it has a commanding market-share lead and where margins are significantly higher than the domestic business. Its market share should also increase in its individual and group annuity division, with strong flows. But it's had a nice move off its recent low and given the volatility in the shares, I'll take some off here.

After the trade, I'll own 2,000 PRU shares, or 3.87% of the portfolio.

Regards,

Jim Cramer

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DISCLOSURE: At the time of publication, Cramer was long PRU, MRO and PG.