Procter & Gamble Works to Stem Tide of Share Losses
Investors would be wise to stock up while shares trade at a 15%-20% discount to our valuation.
The main question leading up to Procter & Gamble’s (PG) fourth-quarter results centered on the company's ability to boost sales and market share amid the industry's tepid pricing and competitive pressures. Organic sales ticked up just 1% in the quarter, driven entirely by increased volume; as has been the case, performance was weighed down by grooming (10% of sales) and baby (27%), which were each lower by 2%-3% on an organic basis. Excluding these two segments, sales popped more than 3%, with beauty (one fifth of sales) again the standout, up 7%. Management highlighted sequential market share improvement across the majority of its mix, a shift from the recent past, when share gains proved elusive on a consolidated basis. We think this gives credence to P&G's past strategic endeavors to rightsize its brand mix (culling more than 100 brands) and funnel added resources to support the brand intangible assets, particularly its entrenched retail relationships, that underlie our wide moat rating.
We don’t think P&G is opting for top-line gains at any cost. The firm is working to extract another $10 billion in costs, aiming to reduce overhead, lower material costs, and increase manufacturing and marketing productivity; this positively affected gross margins by 270 basis points. However, this gain was offset by higher input and transportation costs (110 basis points), unfavorable mix (120 basis points), lower pricing (80 basis points), foreign exchange (40 basis points), and one-time investments (60 basis points), leaving adjusted gross margins 140 basis points lower at just under 48%.
With fiscal 2018 results and 2019 guidance in line with our outlook, we see little change to our $98 fair value estimate, which is based on 3%-4% annual average sales growth and operating margins approaching the mid-20s over the next decade. The shares trade at a 15%-20% discount to our valuation, and with a nearly 4% dividend yield, we think investors would be wise to stock up.
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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.