Why P&G Is Attractive

Erin Lash: Procter & Gamble's shares have continued to languish, down around 15% since the beginning of the year versus a 4% uptick in the S&P 500 index. However, we don't believe this downdraft is reflective of an erosion in the firm's competitive edge, but rather offers an attractive entry point, with shares trading at a more than 20% discount to our $98 fair value estimate. Further, we think the firm's outsize dividend yield of around 4% also stands to bolster shareholder returns, and we believe further growth in the dividend is in the cards.

Although the trajectory of top-line performance across the industry has come under pressure, we surmise that after shedding more than half of the brands from its mix over the past several years, P&G should benefit from more focused brand investments, enabling it to tap into and respond to evolving consumer trends more effectively. From our vantage point, these efforts should prop up sales and volume growth, while also aiding the brand intangible asset source of its wide moat, by reinvigorating its leading brand mix and entrenching its relationship with retail partners.

We don't believe the firm is anchored to accelerating sales at any cost; rather, we think P&G is working to drive more profitable growth, as it also aims to extract $10 billion in costs from its operations. In our view, these savings stand to fuel its spend behind product innovation and marketing to combat intense competitive pressures. Finally, we don't anticipate activist investor Nelson Peltz's addition to the board will accelerate the change that is already under way, but portend the proxy battle in and of itself will ensure management remains squarely focused on delivering sustainable and profitable top-line gains longer term.