Now's the Time to Invest in a More Focused P&G
After recent divestitures, Procter & Gamble will be able to better focus its resources--both personnel and financial--on its highest-return opportunities.
The transaction includes brands in the salon professional, retail hair care, cosmetics, and fine fragrance categories; P&G will continue to compete in the hair care (Head & Shoulders and Pantene), skin care (Olay), and personal care segments.
While the final structure of the deal, which is slated to be completed in the second half of 2016, has yet to be hashed out, P&G favors a reverse Morris Trust transaction, whereby its shareholders will continue to own 52% of the newly combined company with Coty.
We view the deal favorably, given the enhanced focus it affords, and will assess the full impact of the transaction as additional details come to light. However, we don't anticipate a material change to our fair value estimate, which already took into account the planned brand sales announced last year and incorporates our expectations for 4% annual top-line growth--with a more balanced contribution from price and volume--and 23% operating margins by the end of our 10-year explicit forecast. Procter & Gamble stands out as an attractive undervalued investment, and we'd suggest long-term investors consider building a position in the name.
This deal essentially completes P&G's strategic effort to rightsize its brand mix by shedding around 100 brands, or more than half of its existing brand portfolio, which in aggregate posted a 3% sales decline and a 16% profit reduction in the past three years. We don't anticipate P&G will sacrifice its scale edge, maintaining around 90% of its sales base, or more than $70 billion in annual sales. However, it will be able to better focus its resources--both personnel and financial--on its highest-return opportunities, enhancing its brand intangible asset and cost advantage, which form the basis of our wide moat.
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