There is a lot of buzz around the emerging economies like China, India, Russia and other Asian countries. These emerging economies get a lot of attention from analysts, global investment companies, and so-called gurus, because these countries have higher consumption, which in return fuels the growth of today's global economy. Because of booming consumer markets, companies like Procter & Gamble (PG) and Colgate-Palmolive (CL) are getting the most advantage due to their footprints in these countries. Going forward, it is estimated that the gross domestic product of emerging countries will surpass all advanced markets by 2035, and the increasing middle-class population will further push the demand for branded consumer products, automobiles, electronic appliances and much more. In addition, global consumer spending has reached around $42.8 Trillion, and is expected to grow further as concerns rise over the declining the U.S. and European economy. This growing trend will further foster the growth of companies like Procter & Gamble, which has so far remained the baby of investors looking for long-term gains, strong fundamentals and delivered standout result.
Focus on Middle Class
Procter & Gamble's premium products like Tide and Bounty, are more expensive than competing brands yet are considered higher in quality by consumers. The company has around 56% market share in the $8.6 billion laundry detergent market of North America. To balance its offerings in the North American market, the company announced to launch a new product called "Tide Simply Clean and Fresh", which is expected to roll out in February next year. Procter & Gamble will target those customers who've missed out on premium brands like Tide and have ended up purchasing cheaper brands. The company enjoys the lion's share in this market and as a part of its proactive approach Procter & Gamble will roll out "Tide Simply Clean and Fresh" by next year. The company's dominant market share is a result of its premium product in laundry detergent, when it was lacking in mid-tier product. With the launch of this product, the company will also be targeting developing economies, where middle class is a simple target for Procter & Gamble. Therefore, it will gain more out of its new product launch, see higher market share in the laundry detergent market and will have higher revenue in the next year from this segment.
Change in diaper dynamics
On the other hand, in Procter & Gamble's baby care segment, leading diapers brands like "Pampers" and "Luvs" are generating billions of revenue globally every year. The company's baby care department accounts for around 13% of the overall sales, and is one of the top-selling units of Procter & Gamble across the globe. The company found that there is room for improvement in its products, as it sponsored a survey to find ways to improve its sales in these products. In the survey, roughly 30% respondents specified that wet, leaky diapers remained the major concern for them and due to this, babies tend to wake up in the middle of the night. As a result of this, Procter & Gamble went on upgrading these products, resulting in around $10 billion in sales. Moreover, this product upgrade is expected to increase the company's diaper sales especially since it reduced the number of diapers per pack without reducing the price. Respectively, the price of Pampers diapers increase by around 6% or so, which will help the company to improve its profitability in the future.
The global diaper market size has also been increasing from last year's $26.1 billion to around $27.4 billion this year and further to the foreseen $29 billion of next year. This is mainly due to increasing awareness about the product, better products and increasing birth of babies especially in developing markets. Moreover, improvement in diapers and its well-known market reach will increase the global market share of Procter Gamble to around 43.5% this year from 43% of last year. These supporting factors will drive higher revenue for the company in the baby-care segment.
There are people claiming Procter & Gamble is an expensive bet to make, but the current valuations do not support their views. The company is trading at a PE of 20.22, which is lower than its competitors are and lower than sector PE at 37.28. Additionally, it has the lowest PEG of 2.47, which is once again lower than Colgate-Palmolive and Kimberly-Clark (KMB), which have PEG ratio of 2.75 and 2.60, respectively. PEG ratio is equally important when we look for the underpriced stocks in a certain industry and the company with PEG ratio of 1 is most desirable. However, when I compared its price to sales and price to free cash flow, I found Procter & Gamble fairly underpriced. Procter & Gamble has a price to sales of 2.55, which is lower than that of the sector as a whole. To substantiate my views further, I have decided to add more metrics, which is represented in the table below.
Source: Finviz & Reuters
Procter & Gamble has a gross margin of 49.60, which is higher than the sector average, but is lower than Colgate-Palmolive, which has a gross margin of around 58.5%. However, the company is clearly above the average and with the increasing price of its product, I assume this ratio will increase. The company's having lower debt in comparison to its equity is very desirable and since consumer durables is not an asset intensive business debt to equity of 0.47 is a good sign. On the other hand, its competitors, Colgate-Palmolive and Kimberly-Clark, have higher debt and the EPS growth of Procter & Gamble is again a standout compared to others on the list. Going deep into the details, the company has sound dividend yield measuring above the sector's average, which suits the income investors looking for the regular dividends just fine. After assessing its valuations, I can say that the company has enough potential to grow, and investors willing to bet for long-term growth can initiate a long and hold it.
Underperformance in long run
Source: Yahoo! Finance
Procter & Gamble is one of the laggards when it comes to stock performance. In the above five-year chart, the company has hugely underperformed the benchmark index by a fair margin. However, in the fundamental analysis, assumption of "history repeats itself" is not considered, and so I think higher demand of its product will give a lift to the stock in the long-term. I assume that this underperformance trend of the stock will reverse soon, and this will create investment opportunities for long-term investors looking for a solid company with a fair valuation.
After looking at the few recent fundamental points and its attractive valuation, I assume the stock has enough potential to increase from the current stock price of around $78 a share. However, if the market slides down, I will strongly recommend investors to buy this stock at every low level. The best way to trade is to accumulate at $74-$72 a share if the stock is hit hard due to overall market conditions, and hold it for the levels of around $87-$90 per share.