Investors Should Enlarge their Portfolios

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Nov 24, 2014

In this article, let's take a look at the Procter & Gamble Co (PG, Financial), a $239.41 billion market cap company that is a leading consumer products company which markets household and personal care products in more than 180 countries.

Brand portfolio

The company operates through five segments: Beauty (24% of FY 14 net sales); Grooming (10%); Health Care (9%); Fabric and Home Care (32%) and Baby, Feminine and Family Care (25%).

It has 23 brands that each generate over $1 billion in sales (up to $10 billion), including Olay, Pantene, Gillette, Crest, Oral-B, Vicks, Dawn, Downy, Duracell, Fabreze, Tide, Bounty, Charmin and Pampers. Further, it has other 14 brands with sales in the range of $500 million to $1 billion. The brands mentioned already account for 90% of the firm’s top line and 95% of its profits.

International markets

The company entered in new markets, particularly emerging markets. In fiscal 2014 (June), emerging markets accounted for 39%. We believe, in the future, it will achieve a greater percentage of sales coming from international markets.

Cost advantage

The firm plans to reduce $10 billion through initiatives to lower material costs from product design and efficiencies related to productivity. With respect to product innovation, which we think it is a key growth driver for the upcoming future. In fiscal 2014, R&D expenses totaled $2.0 billion.

Revenues, margins and profitability

Looking at profitability, revenues declined by 0.19% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.68 vs $1.03). During the past fiscal year, the company increased its bottom line. It earned $3.98 versus $3.87 in the previous year. This year, Wall Street expects an improvement in earnings ($4.38 versus $3.98).

The gross profit margin is considered rather high; at 53.6%, but the net profit margin of 9.57% trails the industry average.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
PG Procter & Gamble 15.51
CL Colgate-Palmolive Co 118.64
KMB Kimberly-Clark Corp 46.55
CHD Church & Dwight Company, Inc 18.58
 Industry Median 8.78

The company has a current ROE of 15.51% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Church & Dwight Company Inc. (CHD, Financial) and Kimberly-Clark could be the option. For a bigger ratio, Colgate-Palmolive (CL, Financial) shows a tremendously good ROE. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

03May20171248551493833735.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 24.8x, trading at a premium compared to an average of 23.9x for the industry. To use another metric, its price-to-book ratio of 3.69x indicates a premium versus the industry average of 2.01x while the price-to-sales ratio of 3.1x is above the industry average of 1.13x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $16.773, which represents a 10.9% compound annual growth rate (CAGR).

03May20171248561493833736.png

Final comment

As outlined in the article, we believe that efforts will make the company continue to renew its core brands with product innovation. The firm obviously has a benefit from its scale, giving opportunities of cost savings compared to peers. I think investors should consider adding this stock, either for the first time or enlarging your existing position.

Hedge fund gurus like Brian Rogers (Trades, Portfolio), Richard Snow (Trades, Portfolio), Richard Pzena (Trades, Portfolio), Charles Brandes (Trades, Portfolio), Donald Yacktman (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) have added this stock to their portfolios in the third quarter of 2014, as well as Diamond Hill Capital (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Yacktman Focused Fund (Trades, Portfolio), Yacktman Fund (Trades, Portfolio) and Dodge & Cox.

Disclosure: Omar Venerio holds no position in any stocks mentioned