In light of the significant decline in the share price following the Q3 results we are compelled to reiterate our BUY recommendation on Procter & Gamble, especially considering our forecasts are essentially unchanged. Though some disappointment on the results day was probably warranted, given that the FY guidance range was not raised despite the 3c beat and that, against the backdrop of a slowing HPC market, organic sales remained tepid (+3%), the 7% sell-off on the day was a considerable overreaction in our view. A slowdown in HPC is unhelpful, but the share prices of other HPC companies (e.g. L’Oréal, Unilever, Colgate) have not come under similar pressure, and P&G arguably has the advantage thanks to its $10bn of savings to come over the next 3+ years, some of which is already being re-deployed behind the brands in the current year.
P&G met top-line targets and exceeded bottom-line targets during Q3, and market share trends are moving in the right direction across more of the portfolio. FY guidance was not raised due to brand investments expected in Q4, FX headwinds and a slowing HPC market – the latter two factors are hardly unique to P&G (nor self-inflicted) and the former is a sensible step timed around new launches.
The restructuring programme remains on track, with improving market share performance the clearest measure of this. The phasing of savings drop-through and organic sales re-acceleration will not always be steady each quarter but this is normal during restructurings and is no cause for alarm (see Unilever’s quarterly progress throughout its 4 yr. turnaround on pg. 6). P&G remains committed to returning cash to shareholders; in the current year it has raised the dividend 7% and is repurchasing $6bn worth of shares. We tweak our F13 forecast down 4c to $4.04, the high end of the guided range, but our medium-term forecasts already incorporated a weak HPC market and are left virtually unchanged.
P&G currently trades at a discount to peers (16x cal ’14E PE vs. peers on almost 19x). We can easily reach our $87 target using Quest™ by delaying the fade in cash returns by just 2 yrs, which we consider very conservative (we delay by 3 yrs for Unilever).
Share performance catalyst
P&G presents at a competitor conference in Paris (June 11-13), where investors are likely to demand an update on its brand investments and sales growth trends.
- The Procter & Gamble Company (PG): Is It on the Road to Recovery? (insidermonkey.com)
- Consumer Staples No Longer a Buy in This Market (business2community.com)