Trouble in Brand City

You didn't need to clip coupons to get a deal on Tide last week--or Pampers or Crest or Ivory. In fact, shares of Procter & Gamble, the maker of these top-selling household products, were marked down 30% in one breathless Tuesday morning on Wall Street.

The reason? Ostensibly because the $38 billion-a-year behemoth delivered some unexpected bad news--and Wall Street hates surprises--warning that its upcoming third-quarter earnings would fall 10% from the year before, instead of rising 7% as anticipated. For that transgression, Procter's shares were hammered, dropping $27 to $60 and shedding some $35 billion, or roughly a third of the company's market value. In the process, P&G helped drive down the already hurting Dow Jones industrial average 374 points.

P&G blamed the shortfall on a one-time confluence of factors, from a jump in the price of raw materials like pulp and oil to a delay in savings from a sweeping reorganization. "I see this as an aberration, and it will never happen again," CEO Durk Jager vowed. The Street's response, he said, was "not rational behavior."

But the P&G sell-off, rational or not, was very real evidence of the colossal shift by investors out of "old economy" stocks--brand-name, consumer-goods companies that make catsup and cornflakes and diapers and, yes, money--into "new economy" tech wonders that offer more promise than performance, but that nevertheless propelled the NASDAQ past 5,000 last week.

For years P&G's popularity on Main Street had been matched on Wall Street, where its steady, dependable growth and vaunted brand power, like that of many consumer powerhouses, made it a must for countless portfolios. Sure, wireless PDAs and baby websites may be cool, but you can't diaper the baby with a computer mouse, or clean up spilled milk with a virtual paper towel. "The rumors of the demise of national brands have been greatly exaggerated," says Jim Crimmins, worldwide brand planning director of ad agency DDB.

Yet consumer giants such as Heinz, Kellogg, McDonald's, Coca-Cola and Gillette have also taken a beating, falling more than 30%. The culprits: slowing sales and falling profits. Last Friday soap seller Dial saw its stock slip 22% after the company issued its own earnings warning. Dial is down 70% over the past year.

Based on any 20th century valuation model, the big brands are screaming buys, selling at huge discounts to the market. In the 21st century, things are different. Consider, for instance, how Wall Street values P&G's sales compared with those of a dotcom retailer. P&G's price-to-sales ratio: $2.12 of stock per dollar of sales. The same dollar's worth of Tide, say, sold through Priceline.com costs shareholders more: $26.11, based on Priceline's recent close of $94. And to own a dollar-size piece of the sales at fledgling dotcom grocery Webvan, you'll have to spend $228.67 on stock. P&G will earn about $4 billion this year. As for the dotcoms' earnings--are you kidding?