We suggest investors interested in the household and personal-care space consider taking a stake in this wide-moat name.
Erin Lash, CFA
08:33 AM | Email Article
We walked away from Procter & Gamble
's investor event, held in Cincinnati on Nov. 17-18, with renewed conviction that driving productivity savings remains the crux of the firm’s strategic efforts. But rather than this serving merely as a means to boost profits, we sense management intends to use these funds to reinvest behind its brands and support its intangible asset moat source. We’ve long maintained that focusing its resources (personnel and financial) on the highest-return opportunities should position P&G for accelerating sales performance, a stance to which management provided credence, in that the categories the firm is focusing on have historically grown 1 point faster (with 2 more points of profitability) relative to when it operated with a larger brand mix. Partly as a result of its efforts to eliminate costs, we forecast gross margins will expand by around 200 basis points over the next 10 years to 51%, about 200 basis points above its average gross margin over the past five years. However, we also expect P&G will allocate 3% of sales for research and development and 11.5% of sales for marketing annually, up from historical levels of less than 3% and around 11%, respectively.
Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.
Despite the significant brand rationalization the firm has undergone the past two years (shedding more than 100 brands from its mix, leaving it with just 65 brands), we still contend P&G maintains significant scale and negotiating leverage with retailers, given that the brands with which it parted ways accounted for less than 15% of total sales and around 5% of consolidated profits. We don’t expect to alter our $92 fair value estimate, and haven’t wavered on our long-term DCF expectations--annual top-line growth about 4% over the next 10 years and 24%-plus operating margins (from 21% in 2016). With shares trading at more than a 10% discount to our valuation, we’d suggest investors interested in the household and personal-care space consider taking a stake in this wide-moat name.
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