AUGUST 2019 OUTLOOK ON PROCTER & GAMBLE CO. (P&G)

Current P&G Stock Outlook:

·     We are raising our 12-month price target from $105 per share to $119 per share. 

·     In response to Procter & Gamble’s (P&G) quarterly earnings announcement, which beat Wall Street estimates on both the top and bottom lines, the stock proceeded to jump by $4.41/share from $116.00 to $120.41.  

·     The company’s fundamentals have been strong, but we believe there has been additional upward pressure on the stock from investors rotating into the Consumer Staples sector and increasing speculation of a P&G stock split.

·     There are numerous factors we see supporting the stock price over the intermediate term including: current momentum, ongoing collaboration between Nelson Peltz & David Taylor, corporate & staff headcount reductions, organizational changes, an attractive dividend, the Federal Reserve cutting interest rates, potential decline in the U.S. Dollar, and continued improvement in analyst stock reports. 

·     Wall Street analysts that cover P&G had forecasted a price target of $101 per share after the previous quarter’s results and have yet again increased their average 12-month price target, this time by $22.62 per share to $123.62 per share.  This marks four consecutive quarters where the average analyst price target has risen sharply, reflecting increased confidence in management and the board.

Highlights of P&G’s Quarterly Results and Fiscal Year (FY) 2019:

·     Fourth quarter Fiscal Year (FY) 2019 produced revenue of $17.094 billion, exceeding Wall Street expectations of $16.856 billion.

·     For Q4 FY 2019, P&G delivered impressive total organic sales growth of 7%, which represents their strongest quarter in over a decade. This was driven by a 3% lift in volume growth and 3% in pricing.

·     Q4 Core EPS rose 17% over the same period last year to $1.10, exceeding analyst estimates of $1.05 per share. 

·     Beauty increased 8% versus the prior year period. Beauty continues to benefit from strong growth in their premium brands, particularly in developing markets.

·     Fabric & Home Care, P&G’s largest business unit, grew organic sales by 10% compared to the same quarter last year.  

·     Baby, Feminine and Family Care increased organic sales growth by 5% versus the year ago quarter. 

·     Grooming’s organic sales posted a 4% increase in the fourth quarter. 

·     For FY 2019, Organic Sales grew in nine of ten global categories. This growth was broad based with all 15 of the largest markets equal to or ahead of FY 2018.  

Fiscal Year (FY) 2020 Guidance:

·     FY 2020 guidance for organic sales growth ranges from 3% to 4%. The company expects all-in sales growth of approximately 3% to 4%. The company expects foreign exchange to continue to drag on sales but will largely be offset by a positive impact from acquisitions and divestitures.

·     P&G FY 2020 guidance for Core EPS growth is 4% to 9%. 

·     P&G FY 2020 guidance for cash usage includes $7.5 billion for dividends and $6 to $8 billion in direct share repurchases. For reference, FY 2019 included $7.5 billion in dividends and $5 billion of direct share repurchases.

·     P&G also noted various factors that could be headwinds during FY 2020. This includes deceleration of market growth rates, significant currency weakness, commodity cost increases, and geo-political disruptions and economic volatility. 

·     P&G expects an effective tax rate of 17% to 18% in FY 2020.

Understanding our $119 Price Target:

·      Sales Growth, Profitability, and Total Shareholder Return

§ We remain optimistic P&G will exceed revenue guidance for FY 2020 based on recent performance. P&G plans to extract another $10 billion in costs through reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. 

§ We also note the projected increase in cash returned to shareholders. P&G announced a 4% dividend increase after the third quarter results. They also provided guidance for $6 to $8 billion of additional share buybacks in FY 2020. 

·     Fundamentals versus Stock Split

§ Although we believe P&G’s stock price could continue higher in anticipation of a possible stock-split, the fundamentals suggest a $119 per share valuation. If the stock were to split, we would anticipate a modest pull-back, and the stock to lag for 12 to 18 months. 

§ We believe P&G has benefitted from a sector rotation into defensive stocks, which makes it even more attractive given the current global environment. It offers investors global exposure and strong cash flow in a low interest rate environment. 

·     Nelson Peltz and Trian Partners has brought a Shareholder Point of View to the Board and Management

§ Nelson and Trian have a strong track record of adding value for shareholders and holding management accountable. Although it isn’t clear what amount of credit can be attributed to Trian, there has been a significant increase in both the company results and the stock price over FY 2019. 

§  Last quarter, we stated Trian had the potential to bring an additional $20 per share value. At this point, you look at Trian’s entry point and the upside they have captured, and question when Trian will begin to reduce some or all of their investment.

·     Organization Structure Changes

§ The company continues to drive more accountability. These changes include shifting 60% of corporate overhead and reporting lines to the direct business units and opening the hiring process for more external candidates.

·     Macroeconomic, Political, and Competitive Risks

§ P&G notes increased volatility and continues to identify several key risks that they have nottaken into consideration in their guidance: Trade negotiations, significant strengthening of the US dollar, further rising commodity prices, continued political and economic volatility (Brexit, French business confidence), significant deceleration of market growth rates, and increased competition on higher margin products. 

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 Wealth adviser if you would like additional information.

Source: P&G Earnings Release 07/30/2019.

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