January 2018 Outlook on Procter and Gamble Co. (P&G)

Current P&G Stock Outlook:

  • We are increasing our 12-month outlook from $93/share to $99/share.

  • This increase represents a combination of the latest quarterly update from P&G plus the addition of Nelson Peltz to the Board effective March 1.

  • As you will recall, in our prior outlook, we earmarked a $6/share reserve for upside reflecting the positive impact we believed Trian Partners could have on the stock price if Nelson Peltz was elected to the Board.

  • For perspective, Wall Street analysts have an average 12-month stock price target of $93.92/share.  Analyst forecasts currently range between $80/share and $105/share.
  • Please note there has been a $0.34 increase in Wall Street Analyst average since our October 2017 Outlook.
  • We are willing to add another $5-$10/share to the price forecast if David Taylor, the Board and Trian can develop a collaborative relationship.

Highlights of P&G’s Quarterly Results:

  • P&G continues to deliver against plan, but the overall results, especially for top line revenue growth, continue to be very incremental.

  • P&G reported second quarter FY 2018 net sales of $17.4 billion, a 3% increase versus the prior year (note: 1% positive impact due to foreign exchange).

  • P&G had organic sales growth of 2% for Q2 fiscal year 2018.
  • Core earnings per share increased 10% to $1.19, driven primarily by increased net sales & a lower core effective tax rate.
  • Organic sales increased in three of five business segments. The beauty segment was strongest with 9% increase in organic sales year over year. Grooming segment continued to be challenged, seeing a 3% decline in organic sales.
  • Operating cash flow for the quarter was $3.7 billion.
  • In Q2, P&G returned $1.8 billion to shareholders through dividends, and repurchased $1.8 billion of common stock.
  • In April 2017, P&G announced a dividend increase of 3%, from $0.6695 to $0.6896 per share. Historically, dividend increases have averaged around 8%. This is an improvement the versus last dividend increase, in April 2016, which was only 1%.
  • P&G anticipates net earnings benefit of approximately $135 million from Tax Act in FY 2018, with the benefit doubling in 2019, and reaching $600 million in 2020 as the tax rate is fully phased in.

Fiscal Year 2018 Guidance:

  • FY 2018 guidance is again incremental; P&G reiterated its guidance for organic sales growth in the range of 2% to 3%, with all-in sales growth of around 3%.

  • P&G raised its FY 2018 top end guidance for Core EPS growth to 5% to 8%, up from 5% to 7%, which is attributed to the potential benefits from the Tax Act.

  • For FY 2018, dividends are expected to be in the $7.5 billion range.

  • Raised FY 2018 range for share repurchases to $6 to $8 billion, up from $4 to $6 billion.

  • We expect the combination of Trian headlines, 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 $93 to $99 increase Price Target:

 

P&G did Beat the OND forecast

Although the revenue lines continue to reflect slow growth. P&G did beat the earnings forecast for the quarter.

  • We do not understand the selloff in the stock. We believe there is an increasing credibility gap between Jon Moller and Wall Street. In our opinion, if Jon was more open and direct about P&G’s challenges, it would be favorably received by Wall Street. For example, we don’t agree problems in Algeria are a major driver of the company’s results.
  • Although P&G has delivered top line revenue growth at the low end of guidance for the last two quarters, the company maintained its annual target for organic sales growth. This, hopefully, signals better news is coming in the remaining two quarters.
  • Organic Sales growth is lower than category growth rates, indicating P&G can lose share and still meet the forecast.
  • P&G has increased the forecast for reduced corporate taxes. We believe their estimates are very conservative. 

Nelson Peltz and Trian Partners will bring increased focus to the Board and Management.  

  • Nelson and Trian have a strong track record of adding long term value for shareholders
  • We believe Trian has the potential to bring an additional $30 to $40/share in value to the price of the stock. We do not believe that P&G’s current plan brings a “private equity” mindset to the company.
  • We look forward to a day where Trian, David Taylor, and P&G’s Board work in collaboration. Although it’s been painful to watch, adding Nelson to the Board is a start. The good news is David and the Board’s lead director, not P&G’s legal department, can provide leadership and set the tone from here.
  • We believe naming Meg Whitman, a seasoned P&G alum, corporate executive, and tenured P&G director, as lead director will help bridge the gap even further.
  • Providing the Board and Trian’s staff more access to both P&G’s leadership and financial data could help.
  • Finally, creating a working relationship between Jon Moeller, Clayt Daley, and Trian’s resources could substantially improve communication, create a better understanding of where P&G and the Wall Street investment community are coming from, and accelerate progress.
  • We believe a more active and engaged Board, with increased leadership coming from David, Jon, Clayt, and Trian will help P&G create a “safe environment” for newly recruited outside talent to accelerate the change.

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 and increasing productivity. Based on history and guidance, it is unclear what percentage of the $10 billion, if any, will go to the bottom line.

Sales Growth P&G is maintaining their forecast for all-in sales to increase 3% in fiscal year 2018.

Share Repurchases—P&G completed $5.2 billion of direct share repurchases in fiscal year 2017. The company expects to buy back an additional $6 to $8 billion in fiscal year 2018. Share repurchases will continue to be a critical component of our price target.

Macroeconomic, Political, and Competitive Risks—P&G identified several key risks that they have not taken into consideration in their FY 2018 guidance: Significant deceleration of market growth rates, further political and economic volatility, further currency weakness, and further commodity cost increases.

 

The above material is not investment advice and should not be relied upon by any person in making financial or investment decisions.  The price of P&G shares may go down in value and at no time reach the above listed Lenox price target.  Any persons reading these materials should not take any actions without first contacting their investment and tax advisor.

 

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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 01/23/2018