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Introduction

Procter & Gamble (NYSE:PG) is a classic example of a stalwart stock. It makes sense to own the stock in both good and bad times. The company cut costs aggressively in order to return profits to shareholders all the while maintaining both stable and reasonable revenue growth. The company's emphasis on overseas markets while keeping to a core-product portfolio makes business sense. Over the long-haul, investors should anticipate some reasonable yields from this consumer goods company.

Qualitative Analysis

Source: Information pertaining to PG came from the shareholder annual report, along with YCharts.

The company remains on the right footing as it continues to unfold its expansion strategy into foreign emerging markets.

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The compound annual growth in its BRIC division ranges from 17-27%. The company generates extremely reasonable sales growth across its BRIC division, and it is likely that the momentum should be enough to sustain Procter & Gamble's momentum for the coming decade.

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This fundamental assumption can be backed by the continuous growth in revenues over the past four years. The company seems to be on the right track as the company was able to generate $83.68B in sales for 2012. PG derives a large amount of its revenue growth from its emerging markets division. Investors should anticipate the company to continue to expand its presence into foreign markets. This will result in very reasonable returns to shareholders for many years.

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The company was able to improve its profit margins while still maintaining its revenue growth. This is the primary driver behind the sudden rally in the price of the stock. The stock's operating margin is above its four-year average. The company's management plans to emphasize cost cutting as a key driver for net income growth. The cost-cutting strategy is being accomplished without revenue growth turning negative, which implies that management is effective at managing the needs of the shareholders and the business.

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The company's profit margin improvements can be further backed by the company's ability to improve its return on assets above the 4-year average. This implies that the company is able to increase its net income without increasing the amount of assets on its balance sheet. The company is able to expand its business without expending capital on longer-term cash outlays.

Better management, foreign growth, and continued share buy backs keep me optimistic on the company going forward.

Technical Analysis

The stock has been on a continuous uptrend for the past-year. The stock has been able to break above a multi-year pennant formation due to the favorable fundamentals, and the strengthening economy. The stock is poised for a multi-year rally.

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Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock has broken the upper trend line of the pennant formation. The stock could be due for a minor pullback but remains in a multi-year uptrend.

Notable support is $64.00, $72.00, and $74.50 per share. Notable resistance is $78.00, $82.50, and $88.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

PG

Industry

Sector

S&P 500

Current Qtr.

2.10%

5.10%

222.20%

10.50%

Next Qtr.

0.00%

4.00%

93.40%

16.10%

This Year

5.20%

12.20%

5.50%

8.10%

Next Year

7.70%

9.40%

20.80%

12.80%

Past 5 Years (per annum)

0.70%

N/A

N/A

N/A

Next 5 Years (per annum)

7.80%

13.94%

13.92%

8.93%

Price/Earnings (avg. for comparison categories)

19.04

21.99

22.26

18.32

PEG Ratio (avg. for comparison categories)

2.44

1.76

2.53

2.11

Source: Table and data from Yahoo Finance

Analysts have reasonable expectations as analysts on a consensus basis have a 5-year average growth rate forecast of 7.80% (based on the above table). This growth rate is below the industry average for next 5 years (13.94%).

Earnings History

12-Mar

12-Jun

12-Sep

12-Dec

EPS Est

0.93

0.77

0.96

1.11

EPS Actual

0.94

0.82

1.06

1.22

Difference

0.01

0.05

0.1

0.11

Surprise %

1.10%

6.50%

10.40%

9.90%

Source: Table and data from Yahoo Finance

The average surprise percentage is 7% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 1.95

17.84

2004

$ 2.34

18.50

2005

$ 2.70

15.84

2006

$ 2.79

16.49

2007

$ 3.22

16.06

2008

$ 3.86

13.6

2009

$ 4.49

10.1

2010

$ 4.32

12.71

2011

$ 4.12

14.57

2012

$ 3.82

15.64

Source: Data from YCharts

The EPS figure, shows that throughout the 2003-2009 period, the company was able to grow earnings. Throughout 2009-2011, earnings declined. The decline in earnings was due to declining profitability. The next fiscal year is projected to be better than the previous three years due to improvements in profitability along with continued revenue growth.

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Source: Data from YCharts

By observing the chart, we can conclude that the business could have performed better. One of the largest risk factors to PG is management's responsiveness to managing growth. Assuming the company is better managed through cost-cuts, and better deployment of capital, the company will generate reasonable returns over a 5-year time span based on the forecast.

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By 2018, I anticipate the company to generate $5.99 in earnings per share. This is because of product growth, improving global outlook, cost management, share buybacks, and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5 years.

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Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

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Source: Data from YCharts and price history is from Yahoo Finance.

Investment Strategy

PG currently trades at $77.21. I have a price forecast of $82.42 for June 30th 2013. The stock is currently trading near a fair valuation. The stock should be bought at pull backs as a part of a longer-term accumulation strategy.

Long Term

The company is an exceptional investment for the long term. I anticipate PG to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). PG's primary upside catalyst is international expansion, product development, share buy-backs, organic growth and cost management. I anticipate the company to deliver upon my forecast price target of $122.26 by 2018. This implies a return of 83.66% (including dividends) by 2018. This is a great return for a consumer goods stock.

Year

Dividend Yield @ $77.21 per share

Cumulative Total

2012

2.90

2.90

2013

3.21

3.21

2014

3.56

6.78

2015

3.95

10.72

2016

4.38

15.10

2017

4.85

19.95

2018

5.37

25.32

A higher-yielding investment opportunity albeit having a higher risk is to buy the Jan 17, 2015 calls at the $80.00 strike. The call premiums trade at $3.87. The price forecast for the end of 2014 is $88.74. The rate of return if the calls expire at $88.74 is 125.84%, the option will break-even when the stock trades at $83.87.

The option strategy is compelling as the risk-to-reward is reasonable. The risk is reasonable (beta of 0.5)

PG has a market capitalization of $210.9 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

PG is able to manage costs effectively while expanding into foreign markets. The company's management has been able to play its cards right for over a century and a half. So investors should not lose hope here.

The conclusion is simple: buy PG.

Source: Procter & Gamble Is A Refreshing Story