P&G Shares Look Attractive as Strategic Efforts Take Hold

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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