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

 Current P&G Stock Outlook:

  • We are reducing our $99/share price target to $91/share, reflecting increased concerns about aggressive price competition in the Grooming and Baby Care businesses.
  • We continue to believe the forecast numbers being provided by P&G’s senior management and conclude the current stock price may represent an unusual value, especially with the dividend yield close to 4%.
  • For perspective, P&G’s total market cap at $183 billion has not changed over the last 10 years. Over that same time-frame, the dividend yield has increased from 2.5% to almost 4%, and the company has repurchased over $59.2 billion in stock.
  • For perspective, Wall Street analysts have an average 12-month stock price target of $81.79/share. There has been a $12.13 decrease in Wall Street Analyst average since our January 2018 Outlook.  Analyst forecasts now range between $72/share and $98/share, representing a whopping $26/share difference.
  • This sudden decrease, and unusually wide range of analyst forecasts, suggests that some Wall Street analysts are skeptical about P&G’s plans and ability to deliver on their provided guidance.
  • Unfortunately, this may also indicate there may be increased risk that Jon Moeller, David Taylor or both could be at risk of losing their jobs. We do not believe this would be good for the company, employee morale, or the short-term stock price.
  • We would hope that Nelson Peltz proceeds slowly as he enters the Board and are hopeful that he gives David and Jon adequate time to fully explain the company’s current strategy and results.

Highlights of P&G’s Quarterly Results:

  • For the third quarter FY 2018, P&G delivered modest incremental growth, exceeding Street estimates on both the top and bottom line.
  • P&G reported third quarter FY 2018 net sales of $16.3 billion, a 4% increase versus the prior year.
  • P&G had organic sales growth of 1% for the third quarter on 2% organic volume growth.
  • Core EPS rose 4% over the same period last year to $1.00, exceeding analyst estimates of $0.98 per share.
  • Organic sales increased in three of five business segments, led by the beauty segment with a 5% increase in organic sales year over year.
  • As expected, the Grooming & Baby Care segments are challenged, with each seeing a 3% decline in organic sales.
  • Operating cash flow for the quarter was $3.4 billion.
  • In Q3, P&G returned $3.2 billion to shareholders through a combination of $1.8 billion in dividends and $1.4 billion in share repurchases.
  • On April 10, 2018, P&G announced a dividend increase of 4%, from $0.6896 to $0.7172 per share. This marks an improvement over the 1% dividend increase in 2016 and 3% dividend increase in 2017. For perspective, historically dividend increases have averaged around 8%.
  • P&G also announced the purchase of Merck KGaA Consumer Health Business for $4.2 billion. The purchase adds a differentiated, growing portfolio of OTC products, while expanding their footprint into a majority of the world’s top 15 OTC markets, including Asia & Latin America 

Fiscal Year 2018 Guidance:

  • P&G maintained its guidance for organic sales growth in the range of 2% to 3%, adding they are at 1.4% fiscal year to date and expect to be at the low end of the range.
  • P&G expects all-in sales growth of approximately 3% for FY 2018.
  • P&G improved the range of its FY 2018 guidance for Core EPS growth to 6% to 8%, up from 5% to 8%.
  • For FY 2018, dividends are expected to be in the $7.5 billion range, and share repurchases are expected to fall in the range of $6 to $8 billion.

Understanding $91 Price Target:

  •  P&G did beat the third quarter forecast
    • Although the revenue lines continue to reflect slow growth. P&G did beat the earnings forecast for the quarter.
    • We did not understand the selloff in the stock last quarter, and were surprised to see it sell off more after the quarterly earnings were released.
    • Based on the selloff in the price of the stock, there does appear to be an increasing credibility gap between P&G’s senior management and Wall Street.
    • David Taylor joined Jon Moeller on the call for the first time. We see this as a strong positive.
    • David & Jon were both open and direct about P&G’s challenges, especially in the grooming and baby care businesses which was encouraging. The news they shared was not a surprise. As David indicated, we understand the problems, we have seen them before, and we know how to fix them. 
    • When challenged by the analysts about the future attractiveness of the Consumer Package Goods Sector, the ability of P&G to add value for consumers, and the timing of Merck KGaA Consumer Health Business we thought David and Jon provided solid answers. 
  • We believe that Nelson Peltz and Trian Partners will bring Shareholder Point of View and increased focus to the Board and Management.  
    • Nelson and Trian have a strong track record of adding value for shareholders and holding management accountable.
    • 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, which may create opportunity.
    • Though unpopular, we believe adding Clayt Daley to the mix will help streamline communication, create a better working relationship with Trian, and reduce the risk that David Taylor or Jon Moeller leave the company prematurely or for the wrong reasons.
    • The 2018/19 Firm forecast will be a key testing ground for Nelson, P&G’s senior management, and the Board.
  • 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 guidance, it is unclear what percentage of the $10 billion, will drop to the bottom line.
  • Macroeconomic, Political, and Competitive Risks—P&G identified several key risks that they have not taken into consideration in their guidance: Significant strengthening of the US$, further commodity cost increases, further political and economic volatility, and significant deceleration of market growth rates.

 

The above material is not investment advice and should not be relied upon by any person in making financial 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.

 

 

 

 

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 04/19/2018