Procter & Gamble Earnings: Cost Savings Should Boost Brand Investment

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate: $140.00
• Morningstar Rating: ★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Procter & Gamble’s Earnings

Procter & Gamble’s PG fourth quarter featured a 2% bump in organic sales (driven by a benefit from higher prices and favorable mix) that came alongside a 150-basis-point uptick in the adjusted operating margin to 20.8%.

Why it matters: Even in the face of intense competition and macroeconomic angst, we think P&G maintains an unrelenting focus on judiciously investing in its brands and capabilities to drive higher growth and wider margins.

• We don’t think P&G is keen to chase short-term volumes, but it is resolute in its commitment to bring superior products to market across price tiers. The prudence of this approach is illustrated in the fact that price has contributed positively to organic sales growth 19 of the past 20 years.
• We forecast research, development, and marketing will continue to eat up around 13% of sales over our explicit forecast, generally in line with the levels expended historically.

The bottom line: We don’t expect much change to our $140 per share fair value estimate (beyond time value) for wide-moat P&G or our long-term assumptions (4% annual sales growth against mid-20s operating margins).

• At a 10%-15% premium to our intrinsic valuation, shares don’t strike us as particularly attractive. However, trepidation around competition and macro pressures could weigh on the stock and create a more favorable risk/reward opportunity.

Coming up: Without providing much specificity, P&G disclosed its intentions to surgically rationalize select areas of its product/geographic mix (including trimming its feminine care pad offering in Asia and exiting Bangladesh), optimize its supply chain, and alter the makeup of its organizational structure.

• We view each of these efforts as an opportunity to enhance its focus and speed up its decision making, with the ultimate aim of unlocking savings that can be reinvested back into its brands. We perceive these initiatives as astute means by which to withstand mounting headwinds.