OCTOBER 2018 OUTLOOK ON PROCTER AND GAMBLE CO. (P&G)

Current P&G Stock Outlook:

  • In response to P&G’s quarterly earnings announcement, which beat Wall Street estimates on both the top and bottom lines, the stock jumped by $7/share from $80.24 to $87.30.

  • We are increasing our 12-month price target from $91/share to $94/share.  In the event P&G outperforms again in the second quarter, and provides additional signs of a sustainable turnaround, we anticipate increasing our price target once again.

  • The stock, even with the recent runup in price, continues to represent good value, relative to the overall market. This conclusion is based on a combination of the 3.3% dividend yield and the increasing probability the company is finally showing the benefits from its past restructuring programs. We are also hopeful that Nelson Peltz, the Board, and David Taylor will be more collaborative in terms of bringing bigger ideas and holding management accountable to improving results short-term.

  • Wall Street analysts, who forecasted a price target of $82.08/share last quarter, have increased their average 12-month stock price target by a whopping $6 plus to $88.42/share Analyst forecasts now range between $78/share and $100/share, still indicating disagreement between “the experts” on the company’s outlook and valuation.

  • We believe David Taylor has bought himself more time, and we continue to believe if Nelson Peltz, David, and the Board collaborate, good things will happen for the business and the share price.

 

Highlights of P&G’s Quarterly Results:

  • P&G quarterly sales gains marked their strongest performance in five years, driven primarily by volume growth, product innovation, and a healthy U.S. economy.

  • First quarter FY 2019 produced revenue of $16.69 billion, exceeding Wall Street expectations of $16.46 billion.

  • P&G produced total organic sales growth of 4%, driven by a 3% lift in volume growth.

  • First quarter Core EPS rose 3% over the same period last year to $1.12, exceeding analyst estimates of $1.09 per share.

  • Organic Sales increased in four of five business units, and nine of their ten product categories, led by Beauty with a 7% increase versus the year ago period. P&G grew organic sales in 12 of their 15 largest markets in Q1.

  • Fabric & Home Care, P&G’s largest business unit, grew organic sales by 5% compared to the same quarter last year. 

  • After declining organic sales growth during 2017, Grooming made a comeback by growing organic sales by 4%. This was attributed to product innovation, investments in direct-to-consumer programs, and increased pricing in some markets.

  • Baby, Feminine and Family Care was the lone segment to produce negative organic sales growth, down 1% versus the year ago quarter. This was driven primarily by poor performance from the Luvs diaper brand.

Fiscal Year 2019 Guidance:

  • The company maintained Fiscal Year 2019 guidance for organic sales growth ranging between 2% and 3%.

  • P&G lowered the range for FY 2019 all-in sales growth to -2% to 0%, reflecting 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.

  • For FY 2019, the company is forecasting dividends of $7 billion and share repurchases up to $5 billion.

  • As pointed out last quarter, we anticipate 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 It to increase shareholder value. In our opinion, we think this is an opportunity for Jon Moeller, CFO, to provide increased transparency and build credibility with institutional and retail shareholders who would like more clarity on this part of his forecast guidance.  

 

Understanding our $94 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

    • Longer term, call it 3-4 years, we believe Trian has the potential to bring an additional $30 to per share in value to the price of the stock. Its arguable, they have already brought $10.

  • 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 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 10/19/2018