Procter & Gamble (PG) shares have languished since it reported lackluster second-quarter results last month (which included 2% organic sales growth and a 10-basis point erosion in adjusted operating margins to 23.4%), and now trade at a nearly 20% discount to our $98 fair value estimate. However, we think investors would be wise to add this wide-moat name to their shopping carts. The firm faces a barrage of headwinds (persistent competitive and inflationary pressures), but we think productivity initiatives, vast scale, leading brand portfolio, and entrenched relationships with retailers support its solid competitive edge and ultimately stand to bolster its performance.
While the market's confidence in P&G’s ability to drive accelerating sales growth (to a mid-single-digit level over the next several years) has yet to take hold, we think P&G is poised to increase underlying sales at a 4% clip in the longer term, with nearly two thirds of its annual growth from increased volume and the remainder from higher prices and improved mix. Further, the firm is driving efficiency gains with its current $10 billion cost-saving effort by reducing overhead, lowering material costs from product design and formulation efficiencies, and increasing manufacturing and marketing productivity. We think the combination of these initiatives will allow P&G to up its core brand spend behind product innovation and marketing to combat competitive pressures, resulting in improved profits. In our view, the benefits of its more focused investments (and hence its ability to more effectively tap into and respond to evolving consumer trends following its substantial brand rationalization) should yield improvements across its product mix, driving accelerating sales and volume growth, and subsequently aiding the brand intangible asset source of its wide moat. Our long-term forecast calls for operating margins to improve about 500 basis points to more than 24% over the course of the next 10 years.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.