Morningstar

Wide-Moat P&G Still a Bargain

Management’s move to focus the business is constraining near-term growth, but bodes well for long-term profitability, writes Morningstar’s Erin Lash.

Securities In This Article
Procter & Gamble Co
(PG)

Given its leading brand mix and vast resources, we contend that P&G is a critical partner for retailers, which are reluctant to risk costly out-of-stocks with unproven suppliers. We don't think this will change as it slims down--the 65 brands that will remain account for 90% of its top line and 95% of its profits. These efforts should also enable P&G to increase its focus (from both a financial and a personnel perspective) on the highest-return opportunities, which is critical in the intensely competitive environment in which it plays. However, we’ve long thought these initiatives would play out over the next few years rather than a couple of months.

While we intend to ratchet back our current-year sales forecast to reflect a more pronounced mid-single-digit hit from unfavorable foreign exchange, we don’t expect to materially alter our $90 fair value estimate, which incorporates 4% annual top-line growth in the longer term, gross margins approaching 52%, and operating margins exceeding 23% by fiscal 2025. Despite the nearly 3% share price jump, we view wide-moat P&G as undervalued.

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About the Author

Erin Lash, CFA

Sector Director
More from Author

Erin Lash, CFA, is a sector director, AM Consumer, for Morningstar*. In addition to leading the sector team, she covers packaged food and household and personal care companies. Beyond managing a team of nine analysts and associates covering an array of consumer firms, Lash also conducts fundamental analysis of 13 multi-billion-dollar market capitalization firms in the packaged food and household and personal care space.

Before joining Morningstar in 2006, Lash spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance. In this capacity, Lash analyzed financial statements, business strategy, and fundamentals of owned companies and potential investments, presenting her recommendations based on this analysis to State Farm portfolio managers for ownership consideration.

Lash holds a bachelor’s degree in finance from Bradley University’s Foster College of Business. She also holds a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. Lash has completed the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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