Procter & Gamble

The London Olympics with a budget of almost $15 billion kicked off with much fanfare last weekend. For worldwide partners of the Olympics like The Procter & Gamble Company (NYSE:PG) and partners like apparel maker Adidas AG (PINK:ADDYY) however, the games are a play at increasing the bottom line. Adidas expects the Olympics to increase sales by about $157 millionand push it into first place in the United Kingdom within three years. P&G already reaped $100 million in incremental sales from the Vancouver winter Olympics and is predicting an overall additional sales of $500 million this year as a result of its Olympic affiliation.

The world’s largest consumer goods company with a market cap of $178,353 million, The Procter & Gamble Company (NYSE:PG)  is also the world’s largest advertiser chalking up an advertising spend of $3 billion last year alone. This week we take a look at the behemoth behind Pampers®, Pantene®, Covergirl®, Tide®, Cascade®, Iams®, Pepto-Bismol®, Olay®, and Gillette® to name just a handful of its brands. PG’s Thank you, Mom campaign for the Olympics, its biggest in 175 years, has over 700k likes on its facebook page. The company has sponsored over 150 athletes for the Olympics including Michael Phelps.

Our Fundamental Analysis is peer-based. We compare PG to its global peers (the screenshots below shows the peers included in our analysis) and give it a low score of 31/100 for Fundamental Analysis.

This score is an aggregate of our ratings for several attributes that include Valuation Drivers, Operations Diagnostic, Earnings Leverage, Capital Investment Strategy, et cetera. The company lags its peers and is challenged with regards to its Earnings and its Capital Investment Strategy. The analysis below covers all nine attributes that result in PG’s low Fundamental Analysis score. Register on our site to access our analysis on PG’s peers and to customize the peer set.

Company numbers are TTM (trailing twelve months) or latest available. Share price data is previous day’s close unless otherwise stated.

Overview

  • Procter & Gamble Co. trades at a lower Price/Book multiple (2.8) than its peer median (4.2).
  • The market expects PG-US’s earnings to grow at about the same rate as its chosen peers and also does not seem to expect much improvement in its below peer median returns.
  • PG-US employs relatively high amounts of assets while generating relatively median profit margins.
  • Compared with its chosen peers, the company’s annual revenues and earnings change at a slower rate, implying a lack of strategic focus and/or lack of execution success.
  • Over the last five years, PG-US’s return on assets has declined from about median to less than the median among its peers suggesting that the company’s historical competitiveness in operations is slipping away.
  • The company’s margins are around the peer medians and do not suggest any benefit from a pricing or an operating cost advantage versus peers.
  • While PG-US’s revenues growth has been below the peer median in the last few years, the market still gives the stock a PE ratio that is around peer median and seems to see the company as a long-term strategic bet.
  • The company’s relatively low level of capital investment and below peer median returns on capital suggest that the company is in maintenance mode.
  • PG-US has the financial and operating capacity to borrow quickly.

Share Price Performance

Relative underperformance over the last year is in contrast with the more recent outperformance.

PG-US’s share price performance of 4.6% over the last 12 months is below its peer median but its 30-day trend in share price performance of 8.5% is better than the peer median. This recent rising stock price may herald a change in relative share price performance.
Stock price performance over the last month vs. last year charted with respect to peers for Procter & Gamble Co. (PG)

Drivers of Valuation: Operations or Expectations?

Valuation (P/B) = Operating Advantage (ROE) * Growth Expectations (P/E)

Price/Book or P/B valuation is a function of the observed operating performance of the company as measured by ROE multiplied by the market’s current implied growth expectation as measured by the P/E. We define Valuation Premium as the difference between the Market Capitalization and Book Value of Equity, and as a proxy for the NPV of cash-flow associated to the Book Equity investment.
Based on the analysis of the relative contribution to the P/B valuation of “Operations ROE” vs. “Expectations P/E”, we quickly garner insight into peers comparative performance and the market’s assessment of their strategies – are they just “Harvesting” the current business pipeline or are investors betting on a strategic “Turnaround”?

The market does not expect much improvement in PG-US’s currently below median returns.

The market expects PG-US to grow earnings about as fast as the median of its chosen peers (PE of 20.0 compared to peer median of 20.3) but not to expect much improvement in its below peer median rates of return (ROE of 14.5% compared to the peer median ROE of 24.2%). The company trades at a lower Price/Book multiple of 2.8 compared to its peer median of 4.2.
Drivers of Valuation: Operations or Expectations? Operating Advantage or ROE% vs. Growth Advantage or P/E for Procter & Gamble Co. (PG)

PG-US has maintained its relatively low ROE profile from the recent year-end.

PG-US’s ROE is its lowest relative to the last five years and compares to a high of 17.9% in 2011. While its ROE decreased to 14.5% from 17.9% (in 2011), its peer median increased during this period to 24.2% from 23.2%. Relative to peers, ROE fell 4.4 percentage points.
Looking at the last five year-ends, PG-US’s current PE of 20.0 has touched a new high and compares to a 2009 year-end low of 13.2. PE increased (relative to recent year-end 2011) for both the company (to 20.0 from 14.9) and the peer median (to 20.3 from 18.5). Combining both ROE and PE suggests that PG-US’s current PB (price/book) of 2.8 is similar to its average year-end PB of 2.7 over the last five year-ends.
Graph of ROE% on Common Equity showing Peer Median (TTM) for Procter & Gamble Co. (PG)
Graph of Price to Earnings for Procter & Gamble Co. (PG) showing Peer Median (TTM) for Procter & Gamble Co. (PG)

Operations Diagnostic

PG-US employs relatively high amounts of assets while generating relatively median profit margins.

The company employs relatively high amounts of assets (with a turnover of 0.6x compared to peer median of 0.9x) while generating profit margins of 11.3% that are only about median among its chosen peers.
Asset Efficency or Sales/Total Assets vs. Net Margin% or NI/Sales with respect to peers for Procter & Gamble Co. (PG)

PG-US has maintained its relatively low asset

1, 23  - View Full Page