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.


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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? 

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