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May 2017 Outlook on Procter and Gamble (P&G)

Current P&G Stock Outlook:

·      We are increasing our 12-month outlook to $96/share.

·      In our $96/share target, we have included a $7/share reserve for upside reflecting the positive impact of Trian Partners recent $3.5 billion investment in P&G.

·      For perspective, Wall Street analysts have an average 12-month stock price target of $91.50/share.  Analyst forecasts currently range between $79/share and $104/share. Please note there has been a $1.58 or 1.8% increase in the Wall Street Analyst average since our January 2017 outlook.

Highlights of P&G’s Quarterly Results:

·      P&G continues to deliver on the forecast, but the overall results are very incremental.

·      P&G had total organic sales growth of 1% for the quarter.

·      P&G reported third quarter fiscal year 2017 net sales of $15.6 billion, a decrease of 1% versus the prior year (this includes a negative 2% impact from foreign exchange).

·      Organic sales increased in four of five business segments.

·      Core earnings per share were $0.96, an increase of 12% versus the prior year.

·      In Q3, P&G returned $1.8 billion of cash to shareholders as dividends, and repurchased $2.0 billion of common stock.

·      In April, P&G announced a dividend increase to $0.6896 per share, which represents a 3% increase compared to the prior quarterly dividend.

Fiscal Year 2017 Guidance:

·      FY 2017 guidance continues to be incremental; the earnings calls continue to be uninspiring.

·      P&G’s guidance for organic sales growth is in the range of 2 – 3%.

·      P&G expects foreign exchange and minor brand divestitures to reduce sales growth by 2 – 3%.

·      P&G estimates all-in sales for FY 2017 to be down 1% to in-line with the prior fiscal year.

·      P&G maintained its expectation for core earnings per share growth in the mid-single digits versus FY 2016 of $3.67.

·      Consistent with the recent past, the company remains focused on total shareholder return (TSR) through a combination of modest sales growth, increased operating margins, and improved free cash flow.

·      For FY 2017, dividends are expected to be in the $7 billion range, with additional share repurchases of $5 billion. This $5 billion does not include a $9.4 billion share reduction from the Coty sale.  

·      We expect the combination of dividends and share repurchases will keep modest upward pressure on the stock while reducing downside risk if there is U.S. market correction due to a recession. 

Understanding our $96 Price Target:

·      The main drivers necessary to reach our $96 price target include:

o   Activist Investor, Trian Partners $3.5 billion stake in P&G—Trian Partners has a long history of working with Boards of Directors and senior management to bring transformational change and increased shareholder value. We believe that with Trian’s involvement, P&G will trade closer to intrinsic value and perhaps above that. We also believe that Trian will bring about faster transformational change, which could include a restructuring of the balance sheet, a possible break-up of the company and faster headcount reductions.  We believe the overall impact Trian may have on the stock is + $30/share over the next 24-36 months.

o   Continued Cost Cutting—P&G continues to focus on driving out organizational inefficiencies. After completing a $10 billion initiative launched in 2012, P&G launched another $10 billion cost savings initiative. The company expects much of this cost savings to come from driving down the cost of goods.

o   Sales Growth P&G estimates all-in sales to be down 1% to in-line with the prior fiscal year. As we look at sales beyond FY 2017, the strong dollar will continue to pose a challenge for international and overall sales growth.

o   Share Repurchases—P&G closed the Coty transaction in FY 17 Q2, which resulted in a share reduction of $9.4 billion. P&G expects to buy back an additional $5 billion in shares. Share repurchases will continue to be a critical component of our price target.

o   Macroeconomic, Political, and Competitive Risks—P&G identified several key risks that they have not taken into consideration in their FY 2017 guidance: Significant deceleration of market growth rates, further political and economic volatility, further currency weakness, and further commodity cost increases.

Recommendation:

  • Call us for Lenox Recommendations! 513-618-7080 or contact us at info@lenoxwealth.com

Here are some questions you might have if you currently work at P&G:

  • What should I know about Trian Partners and their investment stake in P&G?
  • The last activist P&G investor was Bill Ackman. How is this different? 
  • How does this impact my career outlook with P&G? Should I stay or leave?
  • If I decide to leave, am I better off leaving now or waiting?
  • If P&G has significant restructuring, will my position be eliminated?
  • Trian Partners also invested in Kraft Foods. If I use this as a case study, what can I learn?
  • If I was considering leaving P&G, should this change my thinking?
  • What processes are there to help me rethink and recreate my career?
  • How can Lenox Help?
  • What should I do next? 

We think Lenox’s FinLife Experience needs to be your next step! 

  • You need Clarity, which you can get through our Money Mind® Analyzer and Honest Conversations ® exercise.
  • You need Confidence through your personalized Financial Control Scorecard®, so you know your next move is the best move for your family.
  • You need Control, which you will get through our Client Guidebook. The Roadmap outlines what we need to do in the next 12 months, as well as many years down the road.
  • You need Coaching, so you feel like this potential change in life was the best opportunity you ever had. 
  • Lenox is a Fiduciary and unlike Broker Dealers, we only get paid by our clients, not third party fund managers.
  • We are a Family Office and provide a full menu of financial services. 
  • Find out more information about Lenox at our website: http://lenoxwealth.com 

Past Performance is not indicative of future results.

This newsletter is limited to the dissemination of general information pertaining to its investment advisory/management services. This is not intended to be personalized investment advice. Please contact a Lenox adviser if you would like additional information.

Source: P&G Earnings Release 04/26/2017