P&G Shares Still Attractive as Management Breaks From the Past

A 2% fourth-quarter sales increase, a 50-basis-point reduction in the adjusted gross margin to 47.7%, and a 170-basis-point jump in the adjusted operating margin to 17.1% were all an afterthought when compared with the announcement  Procter & Gamble (PG) will undergo a strategic initiative to shed 90-100 brands.

This represents more than half of its existing brand portfolio, which in aggregate posted a 3% sales decline and a 16% profit reduction over the past three years. The 70-80 brands it will keep (which include 23 that generate $1 billion-$10 billion in annual sales, as well as another 14 that account for $500 million to $1 billion in sales each year), already account for 90% of the firm’s top line and 95% of its profits. As such, we don’t anticipate a material change to our $89 fair value estimate.

However, we found this announcement striking from a strategic perspective. We think this shows P&G is breaking ties with its former self, looking to become a more nimble and responsive player in the global consumer products arena--a particularly important trait given the stagnant growth emanating from developed markets and the slowing prospects from emerging regions. Even a slimmed-down version of the leading global household and personal care firm will still carry significant clout with retailers, and we think these actions will only enhance P&Gs brand intangible asset and its cost advantage, which in combination form the basis for our wide moat.

Management stressed its decision was based on customer preference rather than along geographic lines. In our opinion, these efforts will quell calls to split up the company (given past challenges to respond in a timely fashion to changing market dynamics) at least over the short term. In addition, we don’t believe this signals any shift in how the company intends to position its products, as management was blunt in stating that some of its products do better (namely Oral B and SK-II with their premium price point) than others.

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