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The Procter & Gamble company (PG) headquartered in Cincinnati Ohio, Incorporated in 1905, provides branded consumer good products. The company markets over 300 branded products, and operates through three global business units: beauty, health and well-being, and household care. The company’s products are sold primarily through, mass merchandisers, grocery stores, drug stores and sales to Wal-Mart.
The direction of economic activity, such as government and monetary policy has a minimal effect on Procter & Gamble. Interest rate cuts may help PG, but the economic turn down, will hurt. Other economic factors play a larger role; an increase in inflation can cause consumers to spend their money on generic brands versus PG name brands. The company is also exposed to market risk through interest rate changes, and foreign exchange rates. If not managed property the company could lose billions. To safeguard against sudden exchange rates PG uses the forward contract option that provides a fixed exchange rate between the two currencies. Overall PG produces need based products and not luxury items, which will keep the company in good standings through most economic down falls.
An industry analysis has shown Procter & Gamble’s top competitors; in the personal product industry are Kimberly Clark, Elizabeth Arden, Colgate Palmolive and Avon. PG is a mature saturated company and finds it difficult to expand market share, for a company of its size. To deal with market share expansion and competition PG focuses on cost reduction through a decrease in promotions, coupons and plans to advertise heavily. PG recently teamed with Coke, Wrigley, and Gillett and has the available cash flow to make several businesses investments such as acquisitions and merger, and is not afraid of this business venture. Procter and Gamble has been around for a long time and their methods appeared to work for the company. The earnings growth in the past year has accelerated moderately, compared to growth in the past three years.
Proctor & Gamble
Using the 5 year income statement and balance sheet for Proctor & Gamble, we analyzed some of the key ratios and compared them with the industry standards. We determined that Proctor & Gamble is a strong company with a good profit margin. The company has good prospects for future growth.
Proctor & Gambles’ liquidity position has been a little below average. The NWC has also been in the negative which could indicate a problem with meeting financial obligations.
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Proctor & Gambles’ activity measures are way above normal for receivables and inventories turnovers. As noted above, this would indicate a strong ability to generate cash and handle its assets well. The total asset turnover was staying at average or a little above until the last few years. This decrease in asset turnover was caused by a large increase in goodwill and intangibles for 2006 and 2007. This would be no cause for concern with the company’s profit margin staying well above average.
Proctor & Gambles’ leverage position appears to be on the decline. After examining the balance sheet, this appears to be due to the repurchase of outstanding shares of stock. This action has increased the earnings per share and dividends per share and does not seem to be a cause for worry as the turnover ratios have shown that P & G has the ability to generate the cash it needs.
Proctor & Gambles’ profitability measures seem to be conflicting. The Net Profit Margin has stayed above average and shows that the company has been profitable, maintaining a healthy 13 percent return on sales. However, the ROA and ROE have fallen in the last two years after staying well above normal. This again is due to the large amount of goodwill and intangibles affecting the ROA, and the buyback of stocks affecting the ROE. After the company’s plans to buy back stock for one more year, the ROE should return to a better than average position, while creating a higher EPS.
Overall, Proctor & Gamble seems to be performing strongly. The P/E Ratio has stayed above the average, while the PEG ratio has stayed below average. The book value has also been above average, and a market value more than 3X the book value. With the company buying back shares of its stock, the EPS and MV will continue to rise. The company plans for the stock, now selling at $65.80, to be selling at $80.00 by the end of 2008.
Proctor & Gamble compares very favorably within their peer group. When comparing to other companies in the Sub Industry of Household Products, P&G ranks at the top for Market Cap, P/E Ratio, Annual Revenue, Net Margin, and Return on Revenue. P&G has a beta and dividend yield in the mid range of its industry.
Proctor & Gamble Forecast
In forecasting the future growth of Proctor & Gamble, we have determined that the growth rate over the next five years will remain more or less steady to the past year. Proctor & Gamble recently bought Gillette and is restructuring some of its other divisions. Production in some divisions will decrease with these changes, but due to planned price increase from 3% to 12%, the increased revenues will offset the decreased production, leaving the growth rate steady. With a decrease in the intangibles and goodwill, the profit margins will increase slightly, resulting in an overall increase in net income.
Proctor & Gamble is in the process of buying back outstanding stock. They plan on spending approximately 8 to 10 billion each year for the next three years, buying back about 2% of outstanding common shares each year. The decrease in outstanding shares will increase the earnings per share. With the payout ratio staying average to this years, the dividends per share will also increase. With an increase in earnings and the buyback of shares, the P/E ratio will also increase slightly. This is good news to the investors.
In evaluating the intrinsic value of P&G stock, we determine that P&G is not a very risky company. Household products are a commodity that does well even when the economy is not doing well. Proctor & Gamble produces household and personal products that there will always be a demand for, thereby limiting the effects of a poor economy. P&G stock has a beta of .49, which is an indication of the lower risk of the company. Our forecasted values for price per share of P&G are:
Constant Growth DVM: $69.30
Dividends-and-Earnings Approach: $77.94
P/E Approach: $71.50
When comparing these intrinsic values with the current market price of $65.80, we can assume that the price of P&G stock is undervalued. Considering the strength of the company and the undervaluing of the stock price, we would recommend buying for P&G stock.
We calculate the intrinsic value of P&G as follows:
Applying the Constant Growth DVM:
Dividend Growth Rate = 10% (determined from growth rate of last 10 years)
Required Return = 12% (obtained from company report)
V = 1.27(1+.10) = $69.30
(Assuming stock will sell in 5 years at end of 2012)
PV of future dividends = 6.52
PV of price of stock in 5 years = 71.42
V = 6.52 + 71.42 = $77.94
V = 3.25 * 22 = $71.50