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

Current P&G Stock Outlook:

  • As P&G remains above $100 per share, continues to deliver top and bottom line growth, and speculation grows regarding a stock split, we anticipate the stock price will move towards $110 to $115.

  • 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 fall by $2.85/share from $106.03 to $103.16. This was a surprise to us.

  • We are increasing our 12-month price target from $98/share to $105/share.

  • We believe the stock’s recent run is more attributable to investors anticipating a stock split versus the company’s fundamentals.

  • 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 continued improvement in analyst stock reports and price guidance.

  • Wall Street analysts, who forecasted a price target of $94.21/share last quarter, have once again increased their average 12-month price target by nearly $7 to $101.12/share. This marks three consecutive quarters where the average analyst price target has risen considerably.

Highlights of P&G’s Quarterly Results:

  • Third quarter Fiscal Year (FY) 2019 produced revenue of $16.46 billion, exceeding Wall Street expectations of $16.37 billion.

  • P&G delivered impressive total organic sales growth of 5%, driven by a 2% lift in volume growth, 2% lift in pricing, and 1% lift in positive mix.

  • First quarter Core EPS rose 6% over the same period last year to $1.06, exceeding analyst estimates of $1.03 per share.

  • Organic Sales increased in four of five business units, and eight of ten global categories. The company had organic sales growth in 100% of their geographic regions, most notable was China with impressive 11% organic sales growth, after a 15% gain in Q2.

  • Beauty increased 9% versus the prior year 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 7% compared to the same quarter last year. 

  • Baby, Feminine and Family Care increased organic sales growth by 2% versus the year ago quarter.

  • Grooming’s organic sales posted a 1% decrease in the third quarter.

Fiscal Year 2019 Guidance:

  • The company finally increased the guidance for FY 2019 organic sales to 4%, reflecting the results of the three previous quarters.

  • They reiterated FY 2019 guidance for Core EPS growth of 3% to 8%. From our perspective, this range is excessive and may reflect management’s ongoing concern over certain Board relationships, or the outside possibility of a reserve for a major restructuring in FY 2020.

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

  • During the call, Jon announced a best in class effective tax rate of approximately 15%. 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 to provide increased transparency and build credibility with shareholders who would like more clarity on this part of the guidance forecast.

Understanding our $105 Price Target:

Fundamentals versus Stock Split

  • Although we believe P&G’s stock price will continue higher in anticipation of a possible stock-split, the fundamentals suggest a $105 per share valuation makes sense. Post-split, we would anticipate a pull-back, and for the stock to lag for 12 to 24 months.

 

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 $20 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 $20 to $25 per share.

 

Organization Structure Changes

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

  • We believe the results are beginning to reflect this new organization structure. 

 

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 04/23/2019.