P&G Making Progress, but Colgate Is More Attractive

Erin Lash: A year since its proxy battle with activist investor Nelson Peltz came to an end, P&G shares have trended higher, up at a mid-single-digit clip, outpacing the low-single-digit appreciation in the S&P 500 Index over the same horizon. However, we believe this reflects signs of progress after the prudent steps taken to steady its course over the last several years, as opposed to the oversight of one additional board member.

Although P&G has begun to deliver on its strategic agenda (with organic sales up 4% in the first quarter of fiscal 2019, in excess of the flat- to low-single-digit gains that have characterized the business of late), growth has yet to prove broad based. For one, beauty languished a few years back, but has since reversed course, stringing together mid- to high-single-digit top-line gains over the past six quarters, after parting ways with unprofitable products and launching fare centered on its core anti-aging messaging. We surmise its grooming business--which has posted low-single-digit declines on average since the fourth quarter of fiscal 2017--is also poised for more sustainable sales growth, although not to the same magnitude, as it implements a similar formula after succumbing to intense competition from lower-price upstarts.

In this vein, we'd suggest management's actions to recalibrate its pricing in the segment, invest in on-trend new products, launch its own subscription-based sales model, and drive trials by sending razors to 18-year-old U.S. males, mirror the wide range of endeavors P&G pursued as it worked to steady its footing in beauty.

However, we don't believe the path to sustainable top-line gains will prove linear. As such, we believe shares could retreat if sales falter in the near term, creating a more attractive entry point for shareholders. In the meantime, investors wanting to stock up on the household and personal care sector should look to wide-moat Colgate, in our view, which trades at around a 10% discount to our $70 fair value estimate.