Procter & Gamble Should Continue To Perform
Procter & Gamble (PG) is one of the largest consumer goods manufacturers in the world, providing goods from household toiletries to food and batteries. You might recognize some of their most popular brands such as Crest, Tide and Pringles.
Given the current state of the equity markets, an investment in the Consumer Staples sector is something that any investor can/should have in order to limit their risk and volatility with this market. With a consumer recession likely within the next few months, most people will not be buying their high-end gadgets and gizmos. But I can guarantee you consumers will still buy their household goods because I’m sure they will still want clean clothes and clean teeth regardless of the state of the economy.
Fundamental Drivers
There are many things that separate Procter & Gamble from other household product manufacturing companies.
- Brand Recognition
- Focus on Higher Growth Segments
- Target Pricing strategy
- Diversified Consumer Exposure
- Consistent dividend and earnings growth
Brand Recognition
Everyone has walked down the aisles of their local grocery and convenient stores and seen a Procter & Gamble product, they are everywhere! They have three product lines: Beauty & Health, Household Care and Gillette, each of which has at least four products 
which produce over $1 billion in sales annually. Most companies have trouble making one product with that kind of sales but Procter & Gamble does it with over 20 of their products.
Swiffer, Tampax and Febreeze own at least 50% of the respective markets that they operate in, just to name a few. A vast number of their products can claim to be the #1 or #2 brand in their markets with no signs of slowing down as some of them have over 40% sales growth year over year. Crest it’s trademark toothpaste brand has also taken over the toothpaste market within the past few years distancing themselves from their competitors, as evidenced by the graph. Procter & Gamble’s long history of producing these products with a solid customer base shows that their brand is well recognized among all consumers and will continue to prove to be a key point of growth for the company in the future.
Focus on Higher Growth Segments
Procter & Gamble has always aimed to produce high quality products with the best margins and has done a great job over the past 6 years as it has seen operating margins expand from 15% to over 20%. Although this is great, they can no longer continue this margin expansion without some change. They have recently begun a growth strategy in which they are attempting to get rid of a few of their low margin brands in favor of higher growth segment brands, many of which are in their Health & Beauty business unit, which has doubled its market share over the past decade.
The recent sale of Folgers to J.M. Smucker Co. (SJM) for 2.95 billion allowed P&G to not only gain a controlling stake in J.M Smucker, but it also allowed them to spin off one of their low margin brands, which should have a positive impact on margins in the future. They also sold their ThermaCare unit to Wyeth Consumer Healthcare (WYE), in another attempt to stay focused on their core brands and growth strategy. This strategy that Procter & Gamble has engaged in should prove extremely beneficial in the future to margin growth, especially with the current increase in manufacturing costs due to higher commodity prices. These divestitures and other future ones should help offset this increase and help PG increase its margins in the future.
Target Pricing Strategy
One thing that I found interesting about Procter is related to its pricing strategy. While most firms will create a product, look at the costs it incurred during production and then include a certain percentage of markup to arrive at its final price, PG does the exact opposite. When in product development one of the first things they will do is determine the demand and an appropriate price for the product before setting it into production. Unless they can produce it below this “target price” then they will not produce the product or they will revise their thought process. This saves them from unnecessary capital expenditures, but this also proves to be a great tool for the consumer. They produce goods that they know the consumer can afford. Keeping the consumer first in it’s pricing strategy is a key element of their success. This type of attitude along all lines of their business is what makes it such a huge global player today and shows why it will continue to perform extremely well in the future.
Diversified Consumer Exposure
A quick look at Procter & Gamble’s consumer base shows that over 50% of their sales come from international markets. In a growing global economy this is extremely important, especially since over 20% of their sales come from emerging markets. This also acts as defense, in case one market suffers a downturn, the bottom line of PG is not hurt too significantly. They currently operate in over 180 different countries and I believe this will continue to grow as part of their growth strategies, which will be very beneficial to the long term stability of this company.
Consistent Dividend and Earnings Growth
Procter & Gamble has increased its dividend for the last 52 years and they show no signs of stopping. As an investor in Consumer Staples, dividend is one of the first things to look at, and an increasing dividend shows that the company has been growing and they have the confidence in their products and ability to generate free cash flow well into the future. Their five year dividend growth rate has been over 10%. Starting 
at $0.01 52 years ago, their dividend has increased to $0.40 a quarter. Given their high demand for products during market downturns and upturns, I see no reason why this trend of increasing dividends won’t continue.
For the past 6 years Procter & Gamble has had consistent earnings growth with a CAGR of over 12%. With the acquisition of Gillette a few years back and their current divestitures to fit into their growth strategy, this trend should continue well into the future. As we know earnings will drive the stock price, so as these earnings come in you can expect to see a nice appreciation in the stock price. The company has also produced strong free cash flow over the years, which is one of the best indicators of financial performance and health. With over $5 billion in free cash flow, the company has significant room to expand and support its operations well past their 4Q 2008.
Valuation
- Market Cap: 194.4 B
- P/E: 18.78
- PEG: 1.42
- Operation Margin: 20.42%
- Price/Book: 2.86
- ROE: 16.93%
- Dividend Yield: 2.49%
- 5 Year EPS Growth Rate: 14.52%
At its current price I believe Procter & Gamble offers a compelling valuation. The recent downturn in the market has created a buying opportunity for this consumer giant. It’s historical P/E lies above 20 and right now it is 18.78, which shows that it is undervalued compared to its historical valuation. With margins continuing to grow and an EPS growth rate, ROE and Price/Book better than it’s competitors, I feel PG offers great value to anyone looking for a Consumer Staples stock to diversify their portfolio during these hard times.
You really can’t go wrong with this company as they should continue to perform in the future. They have outperformed the S&P 500 and the S&P 500 Consumer Staples index in the past year and if we really are on the verge of a consumer downturn then Procter & Gamble is one of the best moves you can make, given their strong market position in goods that everyone needs. With their strong management team and consumer research analysts, I have no doubt that they will continue to do whatever they have to do to produce the best goods for their consumers at appropriate prices, while expanding the number of markets they serve, their market share in those markets and the market share of their individual products.
Disclosure: None
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This article has 5 comments:
- truthinvesting
- 169 Comments
My Website
Aug 11 09:16 AM- No Moss
- 51 Comments
Aug 11 09:36 AMEarnings will probably be hurt slightly by a stronger dollar, but the general trend in markets like China is to buy more health and skin-care products, and there is no substitute for strong brands, especially since many of these products are manufactured in the region and are price-competitive.
Gillette has no competition other than Schick, which is equally expensive and a distant second. It's a truly great brand.
Pringles is a strong brand, but it is their only food product. Wonder if it will continue to fit in the company's strategy?
- User 241815
- 1 Comment
Aug 11 09:50 AM- WEBISKING
- 173 Comments
My Website
Aug 11 06:49 PM- Jonathan Liss, SA Editor
- 100 Comments
Aug 12 06:30 AM