Procter & Gamble Company (PG)

Procter and Gamble is a global consumer products brand with market leadership in several segments ranging from beauty to household products. As a leading Consumer Products organization, Procter and Gamble continues to impress with solid growth from core businesses as well as constant diversification through acquisitions and deep penetration into emerging markets. While products such as Crest Toothpaste, Swiffer, and Charmin, among others in the household care segment, provide low margins, several lines of products from recent acquisitions of Gillette and Wella, contribute toward much higher margins for the company. Procter and Gamble sells its products through large discount retailers such as Wal-Mart and Target as well as through smaller mom and pop stores in over 160 countries.

Key figures to observe at the end of the 2006 fiscal year is the impressive growth in sales, diluted net earnings per share and operating cash flow. The dilution impact from the acquisition of Gillette in 2005 contributed to an 8-9% decrease in EPS but nonetheless 2006 EPS grew 4% over the prior year to $2.64. Sales grew at a 20% rate in 2006 due to the effect of acquisitions, divestitures and foreign currency fluctuations. The company has maintained substantial Free Cash Flow and has continued to raise its dividends per common share by 8-12% annually. Moreover, the Return on Invested Capital (ROIC), a measure of how effectively the company uses its equity and debt financing to grow earnings, has increased from 10.8% to 24.1% from FY01-05 but dropped to 9.1% in FY06 due to the Gillette acquisition. These numbers have consistently been above the company’s weighted average cost of capital demonstrating Procter and Gambles’ effectiveness at generating superior returns on its investments.

Looking ahead we expect sales to grow organically at 10-12% annually due to strengthening demand in emerging markets but offset to a certain extent by competitive pressure from rivals. Consequently operating margins are expected to improve gradually due to reduced costs from core businesses, growth in high margin segments, and cost synergies from the Wella and Gillette acquisitions. We expect capital expenditures to be consistent at around 3.9% of sales over the next five years.

Unlevered Free Cash flow, which ignores the impact of debt financing, is expected to have a CAGR of 10.2% over the 5-year period reflecting an impressive cash position for the firm to continue to pay substantial dividends and grow by making strategic acquisitions.

P&G is the largest player in the HPP industry and has a very large lead on its competitors in terms of total sales, which gives it a safe moat within which to operate.

At $73 per share Procter and Gamble is trading well below its intrinsic value calculated as of 06/22/2007. The projected price target of $84.25 is a blend of a Discounted Cash Flow valuation and a comparable firm analysis. A DCF valuation with conservative growth and a Cost of Capital of 6.2% yields a share price of $90.09 (See attached Spreadsheet). The comparable analysis gives an Exit Multiple of roughly 18x last year EBITDA which results in a valuation of $78.40 per share. Please note: Recent turbulence in the credit markets may cause some variance to the intrinsic value but does not change this analysis. Macroeconomic risks are not a strong headwind for Procter and Gamble.

Procter and Gamble has tremendous exposure to fast growing markets such as India and China and this exposure will further add to sales growth in the near future. The firm is effective at leveraging its global presence to increase economies of scale and promote cost synergies. Additionally, expect to see synergies from the acquisition of Gillette and Wella translate into greater earnings and add to cash flow. The company has also been increasing its dividend per share every year which it is able to do with its substantial cash position. The generous amount of Free Cash flow also allows Procter and Gamble to make strategic acquisitions which further enhance its competitive position and allows it to maintain its competitive advantage over rivals.

With solid corporate governance, strong global brand, aggressive growth strategies and sound management with long term vision, Procter and Gamble is a firm poised to maintain its leadership in the consumer staples sector and continue to be hugely profitable in the years to come. This is a company that surely has a presence in our households and deserves a position in our portfolio.

--Gaurav 13:35, December 17, 2007 (PST)

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Keeping their ad budget intact is a good decision. Procter and Gamble really knows what they are doing as far as marketing their products is concerned. At today's post downgrade lows of just over $52 / share, the stock is also paying a healthy and safe almost 3% dividend. You are not going to make a killing with this stock, but at least you will be sure that P&G will come out of this recession intact.

Proctor and Gamble is known for its leading consumer household brands, including Tide laundry detergent, Crest toothpaste, Oral-B floss, Bounty paper towels, Head & Shoulders shampoo, and Duracell batteries. Demand for these items tend to be inelastic, since household goods will always be needed no matter how hard consumers are hit. Proctor and Gamble has also focused on creating value in its products, so they are affordable for all customers.

CEO A.G. Lafley said in October 2008: "The reason P&G has grown so consistently for so long is that we're a company that sticks to the fundamentals. We build brands that improve consumers' lives. We deliver superior value day in and day out. We manage cash and costs with unrelenting discipline. And we invest in innovation as the primary driver of profitable organic sales growth."

Procter and Gamble is a defensive company with low correlation to the market due to the stable demand for its products, and therefore is less impacted by market downturns and/or geopolitical issues. Nevertheless due to its significant international presence currency fluctuations can pose a threat even though the company hedges most of the risks. Furthermore, disproportionate growth in emerging markets of lower margin products could put a squeeze on margins but will likely be offset by the fast growing and high margin Beauty and Health Care segments. Increased competition from other Consumer Product companies such as Colgate-Palmolive, Unilever and Johnson and Johnson can also put downward pressure on sales.

P&G's introduction of compacted laundry detergent next year should help them increase margins on one of their largest products by cutting down costs on packaging and transporting its various lines of laundry detergent.