We think investors who are interested in this space should keep an eye on the firm, as shares are a bit undervalued.
By Erin Lash, CFA | 07-17-17 | 08:50 AM | Email Article

After announcing an ownership stake earlier this year of more than $3 billion, or around 1% of shares outstanding, activist investor Nelson Peltz is now seeking a board seat at  Procter & Gamble .

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

We don’t intend to alter our fair value estimate (which calls for operating margins to expand more than 300 basis points to nearly 25% by 2026 and 4% annual sales growth in the longer term) based on this news. With the shares trading a touch below our valuation, we’d suggest investors interested in the space, where discounts are few and far between, keep an eye on this name.

As we said in February, we believe P&G is taking prudent steps to right its ship, although we’ve long held these investments would take time to yield improvement. Management just closed the book in October on a meaningful multiyear brand rationalization, shedding more than 100 brands from its mix; this leaves it with just 65 brands, which we think positions P&G to benefit from more focused brand spending and hence an ability to more effectively tap into and respond to evolving consumer trends. We think these investments stand to drive accelerating sales and volume growth across the company's mix and, in the process, aid the brand intangible asset source of its wide moat.

Beyond bolstering its top line, P&G is also eyeing further efficiency gains, targeting to extract another $10 billion of costs by reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity. We believe these efforts are unlikely to meaningfully boost margins but rather fuel product innovation (including improved packaging) and advertising (as well as increased sampling to prompt trial) to reignite the company's top-line prospects. As such, we forecast P&G will allocate 3% of sales to research and development and 11.5% of sales to marketing annually, up from historical levels of less than 3% and around 11%, respectively.

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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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