Given all of the transformative actions the wide-moat firm is presently undertaking, we don't anticipate investor Nelson Peltz will call for additional steps to transform the business at this time.
By Erin Lash, CFA | 02-15-17 | 08:18 AM | Email Article

Activist investor Nelson Peltz is reported to have amassed a stake of more than $3 billion in  Procter & Gamble  (which equates to around 1% of shares outstanding). We don’t intend to alter our $92 fair value estimate (which calls for operating margins to expand more than 300 basis points to nearly 25% by 2026 and for 4% annual sales growth in the longer term) based on this news. Shares are trading higher on the announcement of Peltz’s stake, and appear fairly valued, but if the firm struggles to maintain the trajectory of its top-line and profit improvement and its share price suffers, we’d suggest investors consider building a position in this wide-moat name.

Erin Lash, CFA, is a director of consumer sector equity research for Morningstar.

The timing of this investment is interesting. Management just closed the book on the significant brand rationalization conducted over the past two years (shedding more than 100 brands from its mix, leaving it with just 65 brands), which we think positions it to benefit from more focused brand spend (and hence an ability to more effectively tap into and respond to evolving consumer trends). From our vantage point, these investments should yield improvements across its product mix, driving accelerating sales and volume growth, and subsequently aiding the brand intangible asset source of its wide moat.

And the firm isn’t looking merely to drive unsustainable sales gains, but is also working to root out inefficiencies, targeting to extract another $10 billion of costs by reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. Given all of the actions the firm is presently undertaking, we don’t anticipate Peltz will call for additional steps to transform the business at this time (cutting further costs and/or adjusting its business mix). However, if the sustainability of its top-line and margin gains falter, we think P&G could ultimately be prompted to drive even more efficiencies, as well as dispose of additional brands or businesses.

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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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