Skip to Content
Stock Analyst Update

P&G Looks Expensive

We like what we're seeing from the wide-moat firm but think it's overvalued.

Mentioned:

The sustained acceleration in wide-moat Procter & Gamble’s (PG) top line throughout fiscal 2019 is a testament to the merits of its strategic agenda to rightsize its brand mix and drive productivity savings to fuel further investments behind consumer-valued innovation. The fruits of these efforts were again evident in its outsize organic sales growth (a whopping 7% in the fourth quarter, above the 4%-5% in each of the previous three quarters) that reflected a balanced contribution from higher prices, increased volumes, and favorable mix, each amounting to a 2%-3% benefit to sales in the quarter.

However, we don’t think the firm is aiming to reignite its sales trajectory at any cost; rather, we believe management is squarely focused on generating profitable growth longer term. As a part of these efforts, P&G aims to extract another $10 billion in costs, with an eye toward reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. In the quarter, this initiative contributed to a 120-basis-point improvement in underlying gross margins to 48.8%, although these efficiencies were partially offset by higher input costs, unfavorable mix, and unfavorable foreign exchange.

While we will likely bump up our $98 fair value estimate by a low- to mid-single-digit percentage to reflect the firm’s full-year performance and the time value of money, we view the shares as frothy at current levels (especially after the mid-single-digit advance following results), trading at a 15%-20% premium to our valuation. Despite the prudence of its course, we think the combination of much tougher comparisons (relative to the muted top-line increases it was lapping this year, including just a 1% bump in the year-ago fourth quarter) and persistent competitive headwinds (including the potential for increased promotional activity) may knock some of the shine off of P&G’s momentum.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.