Prudent Focus on Efficiency Savings for P&G

On the surface,

However, in the context of persistent competitive and inflationary pressures, we’re more constructive, particularly as the firm’s productivity initiatives, which aided operating margins to the tune of 190 basis points, appear to be gaining traction.

Management edged up the high end of its core earnings growth target for fiscal 2018 to 5%-8% from 5%-7% to reflect the benefit of corporate tax reform on its home turf, but expressed some caution about the potential competitive response, prompting it to hold firm on the bottom end of the range.

While we haven’t wavered on our contention that P&G’s path to sustainable sales gains would prove lumpy, we still believe the benefits from this enhanced focus (after shedding more than 100 brands from its mix over the past three years) will lead to increasing sales and volume growth and aid the brand intangible asset source underlying its wide moat in the longer term.

As such, we see little in the results to prompt a change to our near- or long-term outlook (based on 4% annual sales growth in the longer term and 300 basis points of operating margin expansion to nearly 25% at the end of our 10-year explicit forecast).

But we anticipate a slight uptick (less than 5%) to our fair value estimate to reflect additional cash generated since our last update, as well as the benefits from U.S. corporate tax reform beyond what we had been modeling previously. We now view shares as a bit undervalued, trading about 5%-10% below our valuation, and would suggest investors interested in gaining exposure to the sector consider building a position in this wide-moat name.

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