Procter & Gamble Stock Has Risen 25.8%. Why PG is Still a Good Buy (Buy, Sell or Hold Stock Analysis)

Since June of 2012, Procter & Gamble (PG) stock has surged 25.83%. In April of 2013, however, after reporting a less than stellar year-over-year (Y/Y) sales growth, Procter & Gamble stock tumbled more than 6.5% in just a matter of days. Under these circumstances, investors may be wondering whether Procter & Gamble stock still rates as a Good Buy, Hold or Sell. Does it make sense to hold on to PG shares, buy more at these levels, or seek opportunities somewhere else?

Let’s assess PG’s various fundamental and valuation variables to better determine whether Procter & Gamble Stock is a Good Buy, Hold or Sell?

PG Stock Chart
Yahoo Finance – PG Stock Chart

Procter & Gamble Company (PG) Analysis Breakdown

  1. Procter & Gamble Stock Fundamental Analysis
  2. Valuation Overview – PG Stock
  3. Procter & Gamble Technical Stock Analysis
  4. Favorable / Negative Catalysts for Procter & Gamble Stock
  5. Bottom Line Conclusion
  1. Procter & Gamble Stock Fundamental Analysis

For its Q3 2013 financial results PG delivered relatively tepid results, with sales increasing Y/Y by a modest 3%. Net Income increased to $2.57B a 6.64% improvement from the $2.41B reported last year.

Although PG reported a 5% EPS growth, this was 58% less than the stellar 12% EPS growth reported during Q2 2013 (Oct-Dec 2012). The EPS growth came on the back of a massive $10B cost-rationalization program, including cost-cutting and cost-savings, that has seen management work to reduce material costs and overheads across all businesses.

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However, analysts believe that, because many of these costs are "front-end-loaded", their true impact will likely not materialize for the next several quarters. It is very probably therefore that management will need to do more in the near term (i.e., head-count reduction), so as to maintain EPS growth.

With Operating Cash Flow reaching almost $4B for the quarter, the company was able to raise its dividend by 7%. The firm is also returning value back to shareholders, in the form of share buybacks and dividends, to the tune of $2.6B. For its fiscal 2013 guidance, PG expects to return up to $6B in share buy-backs.

Overall, however, these results were below Wall Street expectations, contributing to the spectacular fall in the Company's stock price immediately following the earnings announcement.    

PG Stock - Is PG a Buy, Sell or Hold

Yahoo Finance – PG Stock Chart

  1. Valuation Overview – PG Stock

With a current Market Cap of around $214.3B, Procter & Gamble towers above its rival KMB (Market Cap $40.5B), but is in approximately the same, if slightly smaller, ball park with JNJ (Market Cap $239.7B). Amongst the three peers, PG has the highest Trailing 12-month (TTM) Net Income ($11.36B).

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On a TTM Price/Sales basis, Procter & Gamble (2.56x) is valued much lower than JNJ (3.49x). However, based on this metric it trades significantly higher than KMB (1.92x) and higher than its Industry peers (2.05x). PG also has a lower TTM P/E multiple (17.52x), which means it is valued much cheaper than JNJ (23.29x), KMB (22.92x) and its other Industry peers (21.46x).

PG - Valuation

Forward looking investors should note, however, that on a 5-year expected Price/Earnings Growth basis, PG seems to look slightly overvalued (with a 5 year expected PEG Ratio of 2.48) when compared to JNJ (2.42), KMB (2.20) and the Industry in general (2.09).

  1. Procter & Gamble Technical Stock Analysis

Procter & Gamble stock has made a remarkable comeback from its late-June 2012 levels, when it was at one point (June 26) trading at $57.39. At that level, the stock was down below its 50-day, 100-day and 200-day Simple Moving Average (SMA). However, the last week of June and early part of July 2012 saw the stock mount a gradual comeback, breaking through resistance at all 3 levels (50, 100 and 200-day SMAs), to maintain its current upward momentum. 

PG - Technicals

  1. Favorable / Negative Catalysts for Procter & Gamble Stock

As one of the oldest and largest institutions operating in the industry, PG's biggest strength lies in its global scale of manufacturing and distribution operations and its unrivalled brand recognition. However, this globally diversified footprint also comes with a price. For instance, the decision by the Venezuelan government to devalue its currency in Feb of this year caused PG to take a massive $200M-$275M one time-hit on its Q3 results. In these unstable economic times, global diversification therefore could either be a catalyst for growth or a negative impact on the firm’s financials.

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The slowdown in the global economy is putting household budgets under tremendous pressure, leaving fewer dollars in the hands of the consumer for buying products that PG has to offer. If the economic recovery in markets like Europe and emerging markets like South America and Asia stall for too much longer, the company could face significant growth and profitability headwinds in the next several quarters.

Procter & Gamble is in the midst of a massive expansion, especially in emerging markets like India, Brazil, Indonesia, Nigeria and China, which in total provide almost 40% of its revenue. However, missteps in introducing newer products and errors in judgment in determining appropriate pricing points have cost the company to lose of some of its market share. Any continuation of such strategic fumbles could be a major catalyst for losing even more ground to competitors.

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PG has rightly identified one of its weak points as being inefficiencies in its manufacturing strategies across regions. Its ambitious cost-cutting and global realignment program therefore intends to deliver over $10B in efficiencies by 2014. These moves are already paying off. For instance, by shifting to manufacturing Pampers in India, the company was able to save an astounding 2,500 basis points (BPS) in Gross Margins. Similar steps, like the plan to cut head count by 2%-4% globally, might be the catalyst needed to bring the company back to growth mode.

  1. Bottom Line Conclusion

Based on our above valuation, fundamental and technical analysis, MarketConsensus rates Procter & Gamble (PG) stock as a MODERATE BUY. However, keep an eye out for results reported by other competitors in the industry, over the next few quarters. Any indication that competitors are gaining market share could likely be confirmation that PG's ambitious reorganization might not be taking hold. At that point, PG would be rated as a SELL.

It would, however, be prudent to wait for a pullback on the stock before accumulating more shares.


Best of luck in your investing,

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(By: Monty R. – MarketConsensus News Contributor)