January 2019 Outlook on Procter and Gamble Co. (P&G)

Current P&G Stock Outlook:

  • 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/share from $90.44 to $94.84.

  • We are increasing our 12-month price target from $94/share to $98/share. In our prior quarterly outlook, we indicated an additional 12-month price target increase would be warranted if P&G again surpassed Wall Street earnings estimates. The second quarter results provided further signs of a longer-term turnaround.

  • Investors reacted favorably to the quarter, and shows the stock is benefitting from exceeding expectations in back-to-back quarters. The stock could benefit further from ongoing collaboration between Nelson Peltz and David Taylor, corporate and staff headcount reductions, organizational changes, a trade agreement being struck by the US and China, the Federal Reserve minimizing future rate increases, and expected improvement in analyst stock reports.

  • Wall Street analysts, who forecasted a price target of $88.42/share last quarter, have increased their average 12-month price target by nearly $6 to $94.21/share. This marks two consecutive quarters where the average analyst price has risen considerably. Analyst forecasts now range between $80/share and $108/share, still indicating some disagreement between “the experts” on the company’s outlook and valuation.

Highlights of P&G’s Quarterly Results:

  • Second quarter Fiscal Year (FY) 2019 produced revenue of $17.44 billion, exceeding Wall Street expectations of $17.15 billion.

  • P&G produced total organic sales growth of 4%, driven by a 2% lift in volume growth.

  • First quarter Core EPS rose 5% over the same period last year to $1.25, exceeding analyst estimates of $1.21 per share.

  • Organic Sales increased in four of five business units, and eight of 10 categories. The company had organic sales growth in all 15 of their top markets, most notable was China with an impressive 15% organic sales growth.

  • Beauty had an 8% increase versus the year ago period. Beauty continues to benefit from strong growth in their premium brands.

  • Fabric & Home Care, P&G’s largest business unit, grew organic sales by 6% compared to the same quarter last year.

  • After Grooming’s organic sales grew by 4% in the first quarter, Grooming’s organic sales posted a 3% decrease in the second quarter due to a combination of lower volume, lower price, and heighten competitive activity.

  • Baby, Feminine and Family Care increased organic sales growth by 3% versus the year ago quarter.

Fiscal Year 2019 Guidance:

  • The company increased the upper range of its guidance by 1%. The revised guidance now estimates FY 2019 organic sales growth ranging between 2% and 4%.

  • P&G also increased the range for FY 2019 all-in sales growth from to -1% to 1%. They maintained the foreign currency headwinds of -3% to -4%.

  • They reiterated FY 2019 guidance for Core EPS growth of 3% to 8%. From our perspective, this is a very broad range and reflects a combination of management’s conservatism and uncertainty in the current environment. Jon specifically highlighted concerns with trade policy, Brexit, and France’s low business confidence.

  • For FY 2019, the company expects to pay over $7 billion of dividends and repurchase up to $5 billion of common shares.

  • As pointed out last quarter, we anticipate there may be a significant increase in after-tax cash flow due to corporate tax reform. The company has not identified the tax savings in the forecast, or how they will redirect the proceeds to increase shareholder value. In our opinion, we believe this is an opportunity for Jon Moeller, CFO, to provide increased transparency and build credibility with both institutional and retail shareholders who would like clarity on this part of his forecast guidance.

Understanding our $98 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

  • We believe Trian has the potential to bring an additional $30 per share in value to the price of the stock over the next three to four years. An argument can be made they have already added $15.

 

Organization Structure Changes

  • The company, primarily driven by Nelson Peltz, is focusing on 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.

 

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, given increased transportation costs, rising raw material costs, unfavorable mix, lower pricing, and volatile foreign exchange.

 

Macroeconomic, Political, and Competitive Risks

  • P&G notes increased volatility and continues to identify several key risks that they have not taken 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 01/23/2019.