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.
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.
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.
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.
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.
PG-US has maintained its relatively low asset turnover profile from the recent year-end.
PG-US’s net margin is its lowest relative to the last five years and compares to a high of 14.5% in 2008. Though its net margin decreased to 11.3% from 14.3% (in 2011), its peer median remained relatively stable during this period at 11.5%. Net margin fell 2.5 percentage points relative to peers (and is now also lower than its peer median).
PG-US’s asset turnover is its highest relative to the last five years and compares to a low of 0.6 in 2007. Compared to 2011, asset turnover has remained relatively stable for both the company (0.6) and the peer median (0.9). Overall, asset turnover and net margin trends suggest that PG-US’s ROA at 7.1% is its lowest relative to the last five years and compares to a high of 8.9% in 2011.
Earnings Leverage
Lagging revenues and earnings imply a lack of strategic focus and/or ability to execute.
Changes in the company’s annual top line and earnings (4.6% and 7.8% respectively) generally lag its peers. This implies a lack of strategic focus and/or inability to execute. We view such companies as laggards relative to peers.
Sustainability of Returns
Relative to peers, recent returns have declined versus last five years.
PG-US’s return on assets is now less than its peer median (7.1% vs. peer median 10.6%) in contrast to its returns over the past five years which were around the peer median (8.3% vs. peer median 9.4%). Recent performance suggests that the company’s historical competitive advantage is slipping away.
Drivers of Margin
Margins do not suggest any relative benefit from a pricing or an operating cost advantage.
The company’s gross margin of 55.8% is around peer median suggesting that PG-US’s operations do not benefit from any differentiating pricing advantage. In addition, PG-US’s pre-tax margin of 15.5% is also around the peer median suggesting no operating cost advantage relative to peers.
PG-US has maintained its median gross margin and pre-tax margin profile from the recent year-end.
PG-US’s gross margin has increased 1.8 percentage points from last year’s low and is now above its five-year average gross margin of 55.2. The increase in its gross margin to 55.8% from 54.0% (in 2011) was also accompanied by an increase in its peer median during this period to 55.8% from 54.0%.
PG-US’s pre-tax margin is its lowest relative to the last five years and compares to a high of 19.4% in 2009. The decrease in its pre-tax margin to 15.5% from 18.4% (in 2011) was also accompanied by a decrease in its peer median during this period to 15.5% from 17.0%. Relative to peers, pre-tax margin fell 1.4 percentage points (and is now also lower than its peer median).
Growth Expectations
The market seems to see the company as a long-term strategic bet.
While PG-US’s revenues growth has been below the peer median in the last few years (1.5% vs. 3.0% respectively for the past three years), the market still gives the stock an about peer median PE ratio of 20.0. The market seems to see the company as a long-term strategic bet.
Capital Investment Strategy
PG-US seems to be in maintenance mode.
PG-US’s annualized rate of change in the capital of -0.1% over the past three years is less than its peer median of 3.9%. This below median investment level has also generated a less than peer median return on capital of 10.7% over the same three years. This outcome suggests that the company has invested capital relatively poorly and now may be in maintenance mode.
Leverage & Liquidity
PG-US has the financial and operating capacity to borrow quickly.
With debt at a relatively low 11.7% of its enterprise value compared to an overall benchmark of 25% (Note: The peer median is currently 8.1%), and a well-cushioned interest coverage level of 16.1x, PG-US can probably borrow quickly. We classify the company as Quick & Able in terms of its capacity to raise additional debt.
PG-US has maintained its Quick & Able profile from the recent year-end.
PG-US’s interest coverage has declined 1.8 points from last year’s high but remains above its five-year average interest coverage of 14.7. While its interest coverage decreased to 16.1x from 17.9x (in 2011), its peer median increased during this period to 27.7x from 26.8x. Interest coverage fell 2.7 points relative to peers.
PG-US’s debt-EV continues to trend upward but is still within one standard deviation below its five-year average debt-EV of 12.4%. Compared to 2011, debt-EV has remained relatively stable for both the company (11.7%) and the peer median (8.1%).
Key Valuation Items
| Company | Market Cap(mn) | Price / Book | Price / Earnings | Dividend Yield (%) |
|---|---|---|---|---|
| Johnson & Johnson | 190,928.0 | 3.1 | 19.1 | 3.3 |
| L’Oreal S.A. | 73,187.4 | 3.4 | 24.4 | 2.1 |
| Colgate-Palmolive Co. | 51,146.5 | 22.3 | 21.4 | 2.2 |
| Reckitt Benckiser Group PLC | 40,292.8 | 4.5 | 14.5 | 3.6 |
| Kimberly-Clark Corp. | 34,240.0 | 6.4 | 20.3 | 3.3 |
| Estee Lauder Cos. Cl A | 21,263.7 | 7.5 | 25.6 | 0.7 |
| Hindustan Unilever Ltd. | 18,153.0 | 27.3 | 36.0 | 1.6 |
| Henkel AG & Co. KGaA ADS | 15,361.2 | 1.3 | 13.9 | 1.2 |
| Clorox Co. | 9,510.6 | N/A | 18.1 | 3.2 |
| Church & Dwight Co. | 8,011.8 | 3.9 | 26.1 | 1.3 |
| Procter & Gamble Co. | 178,353.0 | 2.8 | 20.0 | 3.2 |
| Peer Median | 34,240.0 | 4.2 | 20.3 | 2.2 |
| Best In Class | 190,928.0 | 27.3 | 36.0 | 3.6 |
Revenues & Margins
| Company | Revenues (mn) | Gross Margin (%) | Pre-Tax Margin (%) | Net Margin (%) |
|---|---|---|---|---|
| Johnson & Johnson | 65,016.0 | 73.5 | 19.8 | 15.5 |
| L’Oreal S.A. | 28,302.0 | 74.9 | 17.0 | 12.0 |
| Colgate-Palmolive Co. | 16,940.0 | 59.7 | 22.5 | 14.5 |
| Reckitt Benckiser Group PLC | 15,205.1 | 59.3 | 25.1 | 18.4 |
| Kimberly-Clark Corp. | 21,058.0 | 37.5 | 11.1 | 8.1 |
| Estee Lauder Cos. Cl A | 9,523.0 | 82.4 | 13.1 | 8.9 |
| Hindustan Unilever Ltd. | 4,888.8 | 38.3 | 15.5 | 12.0 |
| Henkel AG & Co. KGaA ADS | 21,856.4 | 48.5 | 11.5 | 8.5 |
| Clorox Co. | 5,409.0 | 45.5 | 14.5 | 9.9 |
| Church & Dwight Co. | 2,797.6 | 46.7 | 17.8 | 11.5 |
| Procter & Gamble Co. | 85,106.0 | 55.8 | 15.5 | 11.3 |
| Peer Median | 16,940.0 | 55.8 | 15.5 | 11.5 |
| Best In Class | 85,106.0 | 82.4 | 25.1 | 18.4 |
Key Assets (% of Revenues)
| Company | Capital (%) | Goodwill & Intangibles(%) | Working Capital (%) | Cash & Equivalents (%) |
|---|---|---|---|---|
| Johnson & Johnson | 124.3 | 53.1 | 46.9 | 52.1 |
| L’Oreal S.A. | 86.2 | 39.8 | 2.5 | 7.6 |
| Colgate-Palmolive Co. | 42.8 | 24.1 | 2.2 | 6.2 |
| Reckitt Benckiser Group PLC | 84.0 | 104.8 | (29.9) | 7.3 |
| Kimberly-Clark Corp. | 58.4 | 17.3 | 3.7 | 3.7 |
| Estee Lauder Cos. Cl A | 42.5 | 11.5 | 18.8 | 12.5 |
| Hindustan Unilever Ltd. | 14.8 | 0.2 | 1.9 | 17.1 |
| Henkel AG & Co. KGaA ADS | 78.3 | 52.1 | 14.5 | 18.0 |
| Clorox Co. | 50.7 | 32.7 | (6.6) | 5.6 |
| Church & Dwight Co. | 81.5 | 63.2 | 11.7 | 8.3 |
| Procter & Gamble Co. | 115.6 | 101.4 | (4.8) | 4.7 |
Key Working Capital Items
| Company | Inventory DSO | Receivable DSO | Payable DSO | Cash Conversion Cycle* |
|---|---|---|---|---|
| Johnson & Johnson | 36.7 | 60.5 | 30.3 | 158.3 |
| L’Oreal S.A. | 34.6 | 64.7 | 57.4 | 41.9 |
| Colgate-Palmolive Co. | 29.4 | 37.7 | 26.2 | 76.1 |
| Reckitt Benckiser Group PLC | 26.3 | 50.8 | 36.4 | 40.7 |
| Kimberly-Clark Corp. | 40.8 | 45.7 | 41.3 | 58.4 |
| Estee Lauder Cos. Cl A | 34.4 | 51.5 | 15.2 | 190.4 |
| Hindustan Unilever Ltd. | 43.4 | 22.0 | 85.2 | (19.8) |
| Henkel AG & Co. KGaA ADS | 35.1 | 52.7 | 54.5 | 28.3 |
| Clorox Co. | 30.5 | 35.3 | 23.9 | 73.3 |
| Church & Dwight Co. | 27.0 | 34.9 | 39.5 | 8.7 |
| Procter & Gamble Co. | 31.5 | 28.1 | 28.8 | 30.2 |
| Peer Median | 34.4 | 45.7 | 36.4 | 41.9 |
| Best In Class | 26.3 | 22.0 | 85.2 | (19.8) |
| * Inventory DSO Receivable DSO – Payable DSO |
Cash Management Indicators
| Company | Current Assets DSO | Current Liabilities DSO | Cash Float DSO* | Excess Cash DSO** |
|---|---|---|---|---|
| Johnson & Johnson | 298.2 | 126.9 | 13.6 | 178.3 |
| L’Oreal S.A. | 132.0 | 123.0 | (19.7) | 21.4 |
| Colgate-Palmolive Co. | 98.3 | 90.4 | (21.5) | 13.4 |
| Reckitt Benckiser Group PLC | 104.5 | 213.7 | (134.6) | 18.0 |
| Kimberly-Clark Corp. | 109.3 | 95.7 | 10.8 | 6.9 |
| Estee Lauder Cos. Cl A | 145.8 | 77.3 | 112.1 | 34.7 |
| Hindustan Unilever Ltd. | 114.0 | 107.0 | (40.2) | 39.9 |
| Henkel AG & Co. KGaA ADS | 154.4 | 101.6 | (9.7) | 53.4 |
| Clorox Co. | 89.3 | 113.5 | (205.6) | 12.9 |
| Church & Dwight Co. | 92.8 | 49.9 | 64.0 | 24.3 |
| Procter & Gamble Co. | 96.3 | 113.8 | (165.8) | 10.7 |
| Peer Median | 109.3 | 107.0 | (19.7) | 21.4 |
| Best In Class | 89.3 | 213.7 | (205.6) | 6.9 |
| * CurrAssetsDSO – CurrLiabDSO – CashDSO | ||||
| ** Excess Cash = Cash & Eqvts – 2%*Revenue |
Key Liquidity Items
| Company | Debt/Enterprise Value (%) | Current Ratio | Interest Coverage (x) | Cash Flow To Total Debt (%) |
|---|---|---|---|---|
| Johnson & Johnson | 8.8 | 2.7 | 27.7 | 70.3 |
| L’Oreal S.A. | 2.0 | 1.1 | 68.5 | 235.5 |
| Colgate-Palmolive Co. | 8.1 | 1.2 | 73.1 | 59.8 |
| Reckitt Benckiser Group PLC | 7.5 | 0.5 | 63.9 | 76.4 |
| Kimberly-Clark Corp. | 14.2 | 1.2 | 10.4 | 43.3 |
| Estee Lauder Cos. Cl A | 4.3 | 1.9 | 21.5 | 96.7 |
| Hindustan Unilever Ltd. | 0.0 | 1.2 | 2,134.6 | 158,215.0 |
| Henkel AG & Co. KGaA ADS | 17.1 | 1.6 | 9.1 | 44.6 |
| Clorox Co. | 17.8 | 0.7 | 7.4 | 26.0 |
| Church & Dwight Co. | 3.1 | 1.9 | 53.4 | 183.7 |
| Procter & Gamble Co. | 11.7 | 0.9 | 16.1 | 43.9 |
| Peer Median | 8.1 | 1.2 | 27.7 | 70.3 |
| Best In Class | 0.0 | 2.7 | 2,134.6 | 158,215.0 |
Key Cash Flow Items (% of Revenues)
| Company | Operating Cash Flow (%) | Capex (%) | Interest Expense (%) | Dividends (%) |
|---|---|---|---|---|
| Johnson & Johnson | 22.7 | 4.6 | 0.9 | 9.5 |
| L’Oreal S.A. | 14.3 | 4.3 | 0.2 | 5.4 |
| Colgate-Palmolive Co. | 17.0 | 3.1 | 0.3 | 7.1 |
| Reckitt Benckiser Group PLC | 18.3 | 1.7 | 0.4 | 9.2 |
| Kimberly-Clark Corp. | 12.5 | 4.7 | 1.4 | 5.2 |
| Estee Lauder Cos. Cl A | 12.3 | 4.2 | 0.7 | 1.6 |
| Hindustan Unilever Ltd. | 9.4 | 1.2 | 0.0 | 3.2 |
| Henkel AG & Co. KGaA ADS | 10.2 | 2.6 | 1.3 | 2.0 |
| Clorox Co. | 11.4 | 3.5 | 2.2 | 5.6 |
| Church & Dwight Co. | 16.9 | 3.0 | 0.3 | 3.5 |
| Procter & Gamble Co. | 15.5 | 4.6 | 1.2 | 6.8 |
Company Profile
The Procter & Gamble Co. provides branded consumer packaged goods to its consumers around the world. Its products are sold primarily through mass merchandisers, grocery stores, membership club stores, drug stores, high frequency stores, and neighborhood stores which serve many consumers in developing markets. The company also intends to expand its presence in other channels, including department stores, perfumeries, pharmacies, salons and e-commerce. It operates through the following segments: Beauty, Grooming, Health Care, Snacks and Pet Care, Fabric Care and Home Care and Baby Care and Family Care. The Beauty segment is comprised of cosmetics, female antiperspirant and deodorant, female personal cleansing, female shave care, hair care, hair color, hair styling, prestige products, salon professional and skin care products. This segment sells its products under the brands Head & Shoulders, Olay, Pantene, and Wella. The Grooming segment offers electronic hair removal devices, home small appliances, male blades and razors and male personal care products. This segment sells its products under the brands Braun, Fusion, Gillette, and Mach3. The Health Care segment consists of feminine care, gastrointestinal, incontinence, rapid diagnostics, respiratory, toothbrush, toothpaste, water filtration and other oral care products. This segment sells its products under the brands Always, Crest, and Oral-B. The Snacks and Pet Care segment sells its products under the brands Iams and Pringles. The Fabric Care and Home Care segment offers laundry additives, air care, batteries, dish care, fabric enhancers, laundry detergents and surface care. This segment sells its products under the brands Ace, Ariel, Dawn, Downy, Duracell, Gain, Tide, and Febreze. The Baby Care and Family Care segment offers baby wipes, diapers, paper towels, tissues and toilet papers. This segment sells its products under the brands Bounty, Charmin, and Pampers. The company was founded by William Procter and James Gamble in 1837 and is headquartered in Cincinnati, OH.
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