Morningstar

P&G Shares Look Attractive as Strategic Efforts Take Hold

The wide-moat firm continues to be plagued by tepid revenue growth, but management’s cost-cutting efforts are encouraging, writes Morningstar’s Erin Lash.

Securities In This Article
Procter & Gamble Co
(PG)

Tepid top-line performance again plagued wide-moat

In addition, the improvements P&G is posting on the cost side are encouraging; after excluding the impact of unfavorable FX movements, adjusted gross margins increased 90 basis points to nearly 50% and adjusted operating margins popped 170 basis points to the high teens/low 20s. But these savings aren't just being realized on its home turf, as management highlighted that it increased core earnings at 4 times the level of sales in emerging markets last year and anticipates earnings growth jumping to 6 times sales in these regions in fiscal 2015, supporting P&G's cost edge.

The impact of FX headwinds is slightly more pronounced, with the firm now expecting FX to hamper full-year sales by 6%-7% versus 5% previously. But when including the impact from our recalibrated cost of capital assumptions, which now better align with the returns that debt and equity investors will demand long term, we're holding the line on our $90 fair value estimate. We contend P&G's strategic endeavor to rightsize its brand mix is a wise course and should enable the firm to focus its resources (both financial and personnel) on the highest-return opportunities, which is critical in the intensely competitive environment in which it plays. With the shares trading below our valuation, we'd recommend investors give this wide-moat name a look in an industry where discounts are few and far between.

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About the Author

Erin Lash, CFA

Sector Director
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Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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