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

 

Current P&G Stock Outlook:

  • We are maintaining our 12-month price target of $91/share.
  • We believe the forecast numbers being provided by P&G’s senior management for 2018/2019 are conservative, after factoring in tax savings and share repurchases.
  • The current stock price, even with the recent runup, we believe represents an unusual value, especially with the dividend yield now close to 3.5%.
  • P&G share attractiveness stems from the continued return of shareholder value through increased dividend payouts and share repurchases ($60.5 billion over the last ten years!), yet the company’s market capitalization has remained fairly stagnant since 2008.
  • Wall Street analysts have an average 12-month stock price target of $82.08/share. Analyst forecasts range between $72/share and $93/share, indicating there remains disagreement between experts on the company’s outlook and valuation.
  • As we indicated in our prior outlook, unfortunately, there could be substantial risk that David Taylor might be replaced, this time by an outside CEO candidate.
  • We were surprised the Board, including Nelson Peltz, approved such conservative earnings guidance for 2018/2019.
  • Is this a sign they are giving David a “layup” to buy more time to deliver on his plans, or is there an agreement at the Board level to not rock the boat while CEO recruiting efforts to find a more transformational leader occur quietly behind the scenes?

 

Highlights of P&G’s Quarterly and Fiscal Year (FY) 2018 Results:

  • For the fourth quarter FY 2018, P&G delivered modest incremental growth, exceeding Wall Street bottom line estimates, but missing on the top line, with revenue coming in short at $16.50 billion vs. $16.54 billion expected.
  • Fourth quarter FY 2018 produced net sales of $16.50 billion, representing a mere 1% increase year over year.
  • P&G had organic sales growth of 1% for the fourth quarter driven by 3% organic volume growth, they noted pricing was a -2% headwind.
  • Fourth quarter Core EPS rose 11% over the same period last year to $0.94, exceeding analyst estimates of $0.90 per share.
  • Once again, Organic Sales increased across three of their five business segments, led by the beauty segment with a 7% increase in organic sales year over year.
  • As expected, the Grooming & Baby Care segments continued to face headwinds (i.e., rising commodity prices and increased competition) in Q4 with Grooming experiencing a 3% decline in organic sales and Baby Care falling 2%.
  • For Fiscal Year 2018, P&G reported total net sales of $66.8 billion, an increase of 3% year over year, including a 2% positive impact from foreign exchange.
  • Total FY 2018 Core Earnings Per Share came in at $4.22, representing an increase of 8% from the prior year.
  • During FY 2018, P&G returned $14.3 billion to shareholders through $7.3 billion in dividends and $7 billion in share repurchases.

 

Fiscal Year 2019 Guidance:

  • Fiscal Year 2019 guidance for organic sales growth ranging from 2% to 3%.
  • P&G expects FY 2019 all-in sales growth of approximately 0% to 1% versus 2018.
  • FY 2019 guidance for Core EPS growth is 3% to 8%.
  • For FY 2019, dividends are expected to be $7 billion, and the company expects to repurchase up to $5 billion in common shares.
  • At this point it remains unclear how P&G will utilize the increased after-tax cash flow from corporate tax reform to increase long-term shareholder value in Fiscal Year 2019 and beyond.
  • A key takeaway was the company’s announcement that after more than a year of trying to combat weak demand with lower prices on staples like Tide Detergent and Gillette razors, they have begun rolling out price increases in North America of 4% on Pampers diapers, and 5% on Bounty, Charmin, and Puffs brands.

 

Understanding our $91 Price Target:

  • Nelson Peltz and Trian Partners will bring 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, especially in large consumer staples who are not adapting quick enough to changing consumer habits.
    • Longer term, call it 3-4 years, we believe Trian has the potential to bring an additional $30 to $40 per share in value to the price of the stock.
    • P&G closed at $80.65 on August 1, 2018. The stock has fallen 12.2% year-to-date, putting added pressure on Nelson and Trian to deliver better results to both P&G shareholders and Trian investors.
  • Continued Cost Cutting—P&G continues to extract another $10 billion in costs, focused on reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. It is not clear how much of this cost savings will drop to the bottom line, especially given major resistances in the form of increased transportation costs, rising raw material costs, unfavorable mix, lower pricing, and volatile foreign exchange.
  • 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 dollar, further rising commodity prices, continued political and economic volatility, significant deceleration of market growth rates, and increased competition on highest 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 07/31/2018