Stock Analyst Update

What Organizational Changes Mean for P&G

Erin Lash, CFA

We walked away from  Procter & Gamble's (PG) investor event, held in Cincinnati on Nov. 8, with renewed conviction that the firm’s efforts to reignite its sales and profit trajectory are gaining traction. However, we don’t believe management is content with the status quo. The firm announced intentions to shake up its organizational structure by focusing on six sector business units that will have direct control over strategy, product and package innovation, and supply chain in its largest markets, including North America, China, Japan, as well as developed European markets, which in aggregate make up about 80% of sales and 90% of aftertax profit. The remaining regions will fall under the purview of CFO Jon Moeller, who will add the title of COO.

This shift aligns with CEO David Taylor’s goal over the past three years to enhance accountability across the organization and better align the firm’s resources and decision-making closer to the consumer, which we view as wise. While we think this structure will help P&G to be more responsive and agile, we don’t expect it to jeopardize the company's ability to harness the benefits of its scale and negotiating leverage.

Even though P&G is not immune to intense competitive and inflationary pressures, we think its productivity initiatives, vast scale, leading brand portfolio, and entrenched relationships with retailers support its solid competitive edge and ultimately stand to bolster its performance. As such, we don’t foresee any change to our $97 fair value estimate or our long-term outlook for 3%-4% annual sales growth and around 300 basis points of operating margin expansion to more than 24% at the end of our 10-year explicit forecast. Despite the recent uptick in price, we still view the stock as a bit undervalued, trading about 5% below our fair value estimate, and we would suggest investors keep this wide-moat name on their radar.

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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.