P&G; Stock Sinks 30% to 3-Year Low

CINCINNATI —  Procter & Gamble Co. shares on Tuesday plunged 30%, erasing $36 billion in value, after the biggest U.S. maker of household goods said fiscal third-quarter profit will fall because raw material costs surged.

Shares of the maker of Tide detergent, Bounty paper towels and Crest toothpaste fell $26.44 to close at $61, a three-year low, on the New York Stock Exchange. Procter & Gamble led the decline in the Dow Jones industrial average, which tumbled 374.47 points to 9,796.03.

The warning comes just a week after the company assured investors that it would meet earnings and sales goals.

In the year since he took over, Chief Executive Durk Jager has cut 15,000 jobs, rolled out new products and considered buying drug companies to lift sales. The company can’t raise prices fast enough to cover rising costs of oil and the pulp used in tissue products and still be competitive with rivals such as Unilever.

“Just when they finally got the sales problem fixed, the cost side comes back to get us,” said Daniel Popowics, analyst with Fifth Third Bank, which owns 11 million shares. “The company needs to put both together.”

The drop in the Cincinnati-based company’s stock was the biggest in one day in at least two decades. Shares of other consumer-products companies fell as well.

“Raw materials costs, particularly pulp and petroleum, are escalating and appear difficult to offset,” wrote analyst Merrill Lynch & Co. analyst Heather Hay in a report.

Clorox Co. fell $3.81 to close at $36.25; Colgate-Palmolive Co. dropped $6.06 to close at $46.75; Kimberly-Clark Corp. lost $5.25 to close at $45.38; Unilever declined $2.06 to close at $22.19 and Gillette Co. fell $2.44 to close at $32.44. All trade on the NYSE.

Clorox, Colgate, Gillette and Kimberly-Clark all said their earnings are in line with forecasts.

P&G;’s earnings in its third quarter ended March 31 will fall 10% to 11% from a year earlier, rather than gain 7% to 9% as the company had forecast. Profit is expected to rise in its fourth quarter, though less than projected.

Jager blamed the shortfall on rising costs of pulp, competition in Latin America and higher-than-expected manufacturing expenses in Europe. Oil prices have reached nine-year highs.

Pulp prices have jumped 30% during the last year because of higher demand in Asia, Europe and North America. The company has announced a price increase to retailers on Bounty towels and Charmin tissue that takes effect in April--too late to help the current quarter.

P&G; expanded sales of its Ariel detergent last year to Argentina, Brazil and Chile. Those markets are dominated by Unilever, which has cut prices to try to maintain its share.

“The focus of building the top line may have taken some of the focus from cost cutting,” Jager said in an interview, adding that Unilever’s “reaction was more severe than we anticipated.”

Procter & Gamble officials had repeatedly assured investors that the quarter was in line with forecasts. Before Tuesday, 14 of the 15 analysts who follow the company had “buy” recommendations, according to Bloomberg News.

“The damning part about it this time is that they were at the Merrill Lynch consumer conference last week and told the audience the quarter was on track,” said Rimas Milaitis, manager of the Strong Growth & Income Fund, who sold all his P&G; shares Tuesday. “It turns out it was not.”

The company believes its shares are undervalued and may step up share repurchases, Jager said.

Procter & Gamble last year said it would cut 15,000 jobs and close plants to cut costs, and use the $900 million in annual savings to help develop new products and spur sales growth.

That plan seemed to be working: Sales in its second quarter rose the most in four years.

Procter & Gamble in June conceded that it likely wouldn’t meet its goal to double sales to $70 billion by 2006. The company has warned several times in recent years that sales wouldn’t grow as fast as projected.

Two months ago, the company held talks to buy drug makers Warner-Lambert Co. and American Home Products Corp. for about $140 billion, but called off the discussions after P&G;’s stock price fell.

The shares have now lost half their value since January, erasing about $75 billion in market value.

“This starts to raise the question of credibility for management,” said Virginia Farnsworth, analyst and portfolio manager at Mellon Private Asset Management, which holds 12 million P&G; shares.

P&G; was expected to earn 78 cents a share in the quarter ending this month and $3.21 in the year ending in June, the average estimates of analysts surveyed by First Call/Thomson Financial. It earned 72 cents in last year’s third quarter.