Wide-Moat P&G Still a Bargain

Given its leading brand mix and vast resources, we contend that P&G is a critical partner for retailers, which are reluctant to risk costly out-of-stocks with unproven suppliers. We don't think this will change as it slims down--the 65 brands that will remain account for 90% of its top line and 95% of its profits. These efforts should also enable P&G to increase its focus (from both a financial and a personnel perspective) on the highest-return opportunities, which is critical in the intensely competitive environment in which it plays. However, we’ve long thought these initiatives would play out over the next few years rather than a couple of months.

While we intend to ratchet back our current-year sales forecast to reflect a more pronounced mid-single-digit hit from unfavorable foreign exchange, we don’t expect to materially alter our $90 fair value estimate, which incorporates 4% annual top-line growth in the longer term, gross margins approaching 52%, and operating margins exceeding 23% by fiscal 2025. Despite the nearly 3% share price jump, we view wide-moat P&G as undervalued.

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