P&G: Recent Stock Drop Offers a Buying Opportunity

By Gayatri Sharma - July 3, 2012 | Tickers: KO, CL, PEP, PG | 0 Comments

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Last month, at a Deutsche Bank conference, Proctor & Gamble (NYSE: PG) management revised its guidance for fiscal 2012 downwards and provided a lower than expected outlook for the fiscal 2013. Slower than expected market growth, market share declines in the developed markets (especially North America) and unfavorable foreign exchange were the main reasons cited by P&G for its guidance revision. The company guided to fiscal fourth‐quarter core EPS in the range of $0.75-0.79 compared to prior guidance of $0.79-0.85, organic growth in the range 2-3% as compared to 4-5% and revenue growth down 1-2% as compared to the prior guidance of 1-2% up.

Sell side estimates have been adjusted downwards and the stock price has reacted negatively reflecting these changes. I believe this recent stock drop provides a buying opportunity and there is a good likelihood that the company can turn around its business going forward. Here are some of the key reasons on why I am positive on P&G.

Re-Focus on Core Business

P&G acknowledged it needs to concentrate on its core business. Going forward, the company will focus on its top 40 country-category combinations representing more than 50% revenue and about 70% of profit; the 20 most promising innovations; and 10 developing markets with the highest growth potential. There are no plans to exit any markets where business already exists, but management will be halting investment in any new country-category combinations. This is a welcome move by the management and similar to the successful strategy adopted by A.G Lafley (former P&G CEO, 2000-2009).

Progress on the 10 billion dollar Cost Saving Plan

The management has reaffirmed its stance on its10 billion dollar cost saving plan over the next 5 years and has already made significant progress in the current fiscal year. The headcount reduction is on track with a 3% reduction in the last fiscal year (ended June) and a 7% reduction being worked on in the next fiscal year. The company has already identified several projects that account for $1 billion of the $2 billion in TDC (total delivery cost) savings it is targeting for next fiscal year. If management is able to achieve its $10 billion cost cutting target, it would mean a ~950bps increase in margins by 2016.

Expectations are already on the lower side

Ever since the last month conference call, the investor expectations on the company are very low. The company’s stock has taken quite a beating and is trading near its 52-week low. This offers a good buying opportunity for the mid to long term as I believe the company understands the challenges it is facing and is already on the right track in addressing them.

P/E and EV/EBITDA is at the lower end among its peer group

Here is a comparison of P/E ratio and EV/EBITDA of Procter & Gamble and its large-cap peer group.

Source: Yahoo Finance

P&G is trading at the lower end of valuations among the large-cap peer group above. I find the risk-reward profile of P&G attractive at these levels and would recommend buying it.

To sum up, P&G’s low valuations coupled with a management strategy to refocus on core business and significant cost cutting initiatives makes P&G a good buy. In addition, low investor expectations and a high dividend yield of 3.7% provides a good downside support for the stock in case the broader macro economic  environment worsens.

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