Huge decline in P&G's gross margins truly ugly
A drop of 19 basis points would have been bad -- but 190? It's a reminder that you would rather be producing commodities than consuming them right now.
Anyone who has listened to conference calls so far this quarter has to be struck by the total relentlessness of the analysts when it comes to gross margins -- to the point where some analysts are openly questioning the success of projects if the gross margins aren't good enough.
Which is why I blanched when I saw the gross-margin numbers from Procter & Gamble (PG) this morning, a decline of 190 basis points.
Hey, 19 basis points would be bad. But 190!?!
Now, that's a negative!
The company is so well run that it was still able to deliver the numbers. Procter & Gamble is much better than it used to be. This margin contraction is truly ugly, however, and it is a reminder that you would rather be producing commodities than consuming them.
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In 2011, the raw costs for companies are going to be crucial. Tech has them pretty much under control. They are going well in finance, including employment, except at the top. I am not that concerned about raw-cost inflation in health care -- things such as resin for Becton, Dickinson and Company (BDX) (what a stock that has become).
Most industrials, chemicals and papers are not having a hard time passing on price increases. Some of the oils have complained, but they should shut their mouths, given what they are getting at the pump.
Who is to worry about? These gigantic packaged-goods companies that have not yet articulated how badly they are going to be hurt, which is how I feel about Procter & Gamble this morning. We've cut back the exposure to this group precisely because of this kind of jarring number.
Wednesday, I talked about the notion of being part of the major trend, which includes the industrials and producers of materials, and de-emphasizing the consumers of materials. I think that these gross-margin results from Procter & Gamble show that the major chord must continue to be played and that the minor ones are to be faded.
In a year when I hear endlessly about how gross margins are all that matter, this Procter & Gamble number will be talked about all day.
I don't want the companies I own to be talked about in anything other than a positive way.
I just don't think that will be the case with any of these packaged-goods companies that do not have gross margins under control.
You just need to be less weighted in this minor chord vs. the major that, when it fails, fails hard, but is otherwise the right place to be.
At the time of publication, Cramer was long PG, K and KO.
Follow Cramer's trades for his Charitable Trust.
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