Current P&G Stock Outlook:
We are reducing our 12-month outlook from $96 to $93/share.
In our $96/share target, we included a $6/share reserve for upside reflecting the positive impact Trian Partners could have on stock price if Nelson Peltz was elected to the Board.
- Assuming Peltz has officially lost the proxy fight, but Trian remains an engaged shareholder advocate, we have reduced the reserve from $6 to $3.
- For perspective, Wall Street analysts have an average 12-month stock price target of $93.58/share. Analyst forecasts currently range between $80/share and $105/share.
- Please note there has been a $1.21 or 1.3% increase in the Wall Street Analyst average since our August 2017 outlook.
Highlights of P&G’s Quarterly Results:
- P&G continues to deliver on the forecast, but the overall results, especially for top line revenue growth, are very incremental.
- P&G had organic sales growth of 1% for Q1 FY 2018.
- P&G reported first quarter fiscal year 2018 net sales of $16.7 billion, a 1% increase versus the prior year (note: foreign exchange had no net impact on sales for the quarter).
- Organic sales increased slightly or were unchanged in three of five business segments.
- Core earnings per share were $1.09, an increase of 6% versus the prior year.
- Operating cash flow for the quarter was $3.6 billion.
Fiscal Year 2018 Guidance:
- FY 2018 guidance continues to be incremental; P&G is maintaining its guidance for organic sales growth in the range of +2 to +3%, with all-in sales growth of around 3%.
- P&G’s guidance for core earnings per share growth in the 5% to 7% range, also remains unchanged versus FY 2017 of $3.92.
- For FY 2018, dividends are expected to be in the $7.5 billion range, with additional share repurchases in the $4 to $7 billion range.
- We expect the combination of Trian headlines, dividends and share repurchases will keep modest upward pressure on the stock while reducing downside risk if there is U.S. market correction due to a recession.
- P&G announced a dividend increase of 3% in April 2017, from $0.6695 to $0.6896 per share. Historically, dividend increases have averaged around 8%.
Understanding our reduction from $96 to $93 Price Target:
- We do not believe Nelson Peltz and Trian Partners will go away any time soon.
- We now believe David Taylor has more career risk if P&G misses a forecast. This is not a better situation for the company. We look forward to a day where Trian and David work collaboratively. We believe a new lead director could help bridge the gap.
- Nelson has a strong track record of adding value for shareholders. Our sincere hope was that the Board would quietly invite him to take a seat. We were disappointed that so much management time and money was wasted on a proxy fight.
- We believe Trian has the potential to bring an additional $30 to $40/share in value to the price of the stock. We just do not believe that P&G’s current plan brings a “private equity” mindset to the company.
- We do not believe Trian can bring this transformational value without pursuing for more aggressive headcount reductions, insisting on higher value-added spending on both R&D and marketing, challenging the current dividend policy where earnings are double taxed, and pushing for increased purchases of shares through low-cost debt.
- We admire David Taylor. We believe that in order for David to add the most value, this Board needs to bring a stronger outside point of view and push, when required, for more transformational change faster.
- We believe this Board has been slow to act and has only provided leadership when forced. We believe the Board needs to be shaken up. We would like to see P&G replace James McNerney with a more transformational and independent Lead Director who can bridge the gap between David Taylor and Nelson Peltz.
- We still don’t think P&G is a “safe environment” for newly recruited outside talent, until there is a change in the lead director role.
- Continued Cost Cutting—P&G continues to focus on driving out organizational inefficiencies. After completing a $10 billion initiative launched in 2012, P&G launched another $10 billion cost savings initiative. The company expects much of this cost savings to come from driving down the cost of goods and increasing productivity. Based on history and guidance, it is unclear what percentage of the $10 billion, if any, will go to the bottom line.
- Sales Growth— P&G is maintaining their forecast for all-in sales to increase 3% in fiscal year 2018. We don’t understand, yet, why this relatively low target is acceptable to the Board.
- Share Repurchases—P&G completed $5.2 billion of direct share repurchases in fiscal year 2017. The company expects to buy back an additional $4 to $7 billion in fiscal year 2018. Share repurchases will continue to be a critical component of our price target.
- Macroeconomic, Political, and Competitive Risks—P&G identified several key risks that they have not taken into consideration in their FY 2018 guidance: Significant deceleration of market growth rates, further political and economic volatility, further currency weakness, and further commodity cost increases.
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 adviser if you would like additional information. Source: P&G Earnings Release 10/20/2017