August 2017 Outlook on Procter and Gamble (P&G)
Current P&G Stock Outlook:
We are maintaining our 12-month outlook of $96/share.
In our $96/share target, we have included a $6/share reserve for upside reflecting the positive impact of Trian Partners $3.5 billion investment in P&G and pending proxy fight to secure a board seat for Nelson Peltz. We would have increased our 12-month outlook to $102/share and included a $12/share reserve if Trian was not facing a proxy fight with P&G.
- For perspective, Wall Street analysts have an average 12-month stock price target of $92.37/share. Analyst forecasts currently range between $80/share and $104/share. Please note there has been a $0.87 or 0.9% increase in the Wall Street Analyst average since our May 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 2% for Q4 FY 2017.
- P&G reported fourth quarter fiscal year 2017 net sales of $16.1 billion, unchanged versus the prior year (this includes a negative 2% impact from foreign exchange).
- Organic sales increased or were unchanged in three of five business segments.
- Core earnings per share were $0.85, an increase of 8% versus the prior year.
- Operating cash flow for the quarter was $3.7 billion.
- During FY 2017, P&G returned nearly $22 billion of value to shareholders as dividends, share exchanges and direct share repurchases.
Fiscal Year 2018 Guidance:
- FY 2018 guidance continues to be incremental; top line revenue growth remains uninspiring.
- P&G’s guidance for organic sales growth is in the range of 2 – 3%.
- P&G expects all-in sales growth of around 3%.
- P&G anticipates core earnings per share growth of 5 – 7% versus FY 2017 of $3.92; primarily driven by core operating profit growth.
- The company expects the lowest organic sales and core EPS growth results to occur in the first quarter of FY 2018.
- 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 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 $96 Price Target:
- The main drivers necessary to reach our $96 price target include:
- Nelson Peltz of Trian Partners is “backdoored” into Proxy fight by P&G Management & Board—Nelson has strong track record of adding value for shareholders. Our sincere hope was that the Board would invite him to take a Board seat. We are disappointed that time is being wasted on a proxy fight. Trian is a large shareholder and deserves Board representation, even if management believes they already have the best plan and don’t need help. We do not believe that P&G’s current plan brings a “private equity” mindset to the company. We believe Trian can bring an additional $30 to $40/share in value to the price of the stock. Despite Trian’s recent publicity to the contrary, we do not believe they can bring this value without pushing for more aggressive headcount reductions, insisting on higher value added spending on R&D and marketing, challenging the current dividend policy where earnings are double taxed, or pushing for increased purchases of shares through low-cost debt. We believe the Board has been slow to act and has only provided leadership when forced. We believe that the P&G Board needs to be shaken up, even if P&G has the right management team, strategic plan and ensures increased accountability. We believe it’s a legacy Board from the AG days and we do not believe strong leadership has been demonstrated by this Board. We recall one of our clients who submitted a resolution to split the CEO/chair roles, and that P&G legal did everything possible to make sure the resolution was not included in the proxy. We admire David Taylor, but his leadership strength is primarily known for incremental change and steady as she goes leadership. The outside world has been changing faster than P&G. The performance has been poor. The Board, the management team, and the employees need to be challenged to do better. We believe that in order to add value, this Board needs to bring a stronger outside point of view and push, when required, for more transformational change. We just don’t see transformational leadership showing up without Nelson’s involvement on this Board. We do not see the $30 to $40 of additional share price without Nelson’s direct involvement. We believe that there is at least a 50% probability Institutional Shareholder Services (ISS) will side with Trian and Nelson will be elected to 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 history and guidance, it is unclear what percentage of the $10 billion will go to the bottom line.
- Sales Growth— P&G is forecasting 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 $4 to $7 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.
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Source: P&G Earnings Release 07/27/20