Market Still Underestimates P&G

Even after ratcheting back our current-year sales forecast to reflect a more pronounced hit from unfavorable foreign currency movements (which management now pegs at 7%, up from 5%-6%), the impact to our $90 fair value estimate is negligible. Longer term, our forecast for annual sales growth amounts to around 4%, with just less than two thirds of annual growth resulting from higher volume and the remainder from increased prices and improved mix. We expect operating margins of 23% (about 400 basis points above the average of the past five years) as the firm reinvests a portion of any savings realized to support the intangible asset source of its wide moat.

We haven't wavered from our stance that with its leading brand mix and vast resources, P&G is a critical partner for retailers, which are reluctant to risk costly out-of-stocks with unproven suppliers, supporting the firm's competitive edge. But we still don't believe the market shares our assertion regarding the firm's competitive prowess and ability to reignite its top line. Despite the recent runup in the share price, we still view P&G's valuation as attractive.

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