Is Procter & Gamble's Target Price Justified?

| About: The Procter (PG)

Procter & Gamble (NYSE:PG), the world's leading consumer goods company, had its price objective raised by JPMorgan Chase & Co. from $90 to $97 in a report released on October 28, 2013. The current price of the stock is $81.52. Several other analysts including those at B. Riley and Wells Fargo & Co. have also changed their ratings of P&G stock. This denotes the fact that the company's stock has an upside potential and much to offer investors. The raise was immediately done after the company released its first quarter FY14 results.

In this article I will analyze the rationale behind the price raise and determine whether or not this increase will be sustained in the long run.

First Quarter FY14 Results

The company mainly operates in five business segments. Its fabric care and home care as well as its snacks and pet care segments contribute 27.9% of its total stock price. The beauty segment contributes 21.4%; the baby care and family home care segment contributes 20.1%; the health care segment contributes 16.5% and the grooming segment contributes 14.2%.

The company has announced its first quarter results for fiscal year 2014 have met analysts' expectations. The net sales rose by 2% due to the 4% increase in volume in comparison to the first quarter of the previous year. Sales reached $21.2 billion whereas analysts estimated $21.1 billion.

The sales of the fabric care and home care segment, the largest contributor to the stock price, rose by more than 3%. The sales in the baby and family home care segment rose by 4.86%. The other three segments experienced a decline in their revenues. However, this decline was offset by the aforementioned sales increase in the other segments.

The net earnings of the company rose by 7% YoY to $3.1 billion. The main drivers for this increase were an increase in sales, reduction in selling, general and administrative expenses and lower effective tax rates. The operating margin of the company improved by 50 basis points while the net margin improved by 70 basis points.

As a result of the company's productivity and cost-savings plans, executed during February to November 2012, total selling, general and administrative expenses decreased 3% to $6.2 billion. These expenses, as a percentage of sales, decreased 160 basis points to 29.4% on a year-over-year basis.

Together these factors improved the company's per share earnings by 8.33% from $0.96 per share in 1Q13 to $1.04 per share in 1Q14.

Sustainability of Revenue Growth

Cosmetics, personal cleansing, deodorants and antiperspirants, pre- and post-shave products, batteries, oral care products in developing countries and home, fabric, baby and family care products positively contributed towards the revenue growth of the company in the first quarter of FY14. Now let us examine the future demand of these products to determine whether or not they will continue contributing towards the company's growth.

Thanks to the increasing population, prospering economies, increasing disposable incomes and growing interest in personal grooming, the demand for most of P&G's products will continue to rise in the future. The personal care and cosmetic application products are forecasted to be the fastest growing end-use application market registering a CAGR of 3.6%. The US represents the largest regional market for fatty esters worldwide and this primarily driven by the growing demand for products from the personal care and cosmetics sector. Asia Pacific is projected to be the fastest growing regional market in the coming years.

Men today have become highly concerned about their grooming habits as well. This can be seen in the reports of higher sales of shaving products and men's shampoos. Based on this trend, the global industry analysts forecast the market for shaving products to reach $7.9 billion by 2018. The regions with the highest demand for these products are expected to be Asia Pacific and Latin America.

The increased awareness of personal hygiene has also increased the demand for oral care products, deodorants and antiperspirants and female hygiene products. Besides that, this trend has boosted the demand for tissue papers, toilet papers and paper towels. It is forecasted that the annual demand for tissue papers will grow at 4.1% till 2021.

The rising birth rate has also increased the demand for baby diapers and baby skin care products. The global diaper market is estimated to reach a market size worth $63.2 billion by the year 2017.

The changing consumer dynamics, especially in developing countries, along with the rising population will significantly support the revenue growth of Procter & Gamble in coming years.

The sales of P&G may be affected in the US due to uncertain macroeconomic conditions and the after-effects of the recent government shutdown. Also, the US market has reached a saturation point. However, there is a huge opportunity for P&G to expand its operations and market share in the Asia Pacific region in order to offset the lower sales in US. The company is currently increasing its focus on the emerging economies to tap into the high growth opportunities so it is expected that the revenue growth rate will be higher in the next quarters.

Sustainability of Margins

The company's management announced a restructuring program in 2012 through which it intends to save $10 billion in costs. The program is expected to be completed by the end of FY16. Through this program it is projected that the company will save $6 billion in COGS, $1 billion by improving marketing strategies and $3 billion in non-manufacturing overhead.

The plan has already positively impacted P&G's financial results as its operating margin in FY13 improved by 133 basis points and net margin improved by 59 basis points. In the first quarter of FY14 the operating margin improved by 50 basis points compared to the results of the same quarter of the previous year.

It is expected that once the plan is fully executed it would further reduce costs and improve margins. It is expected that the margin improvement will be sustained in the long run.

Final Thoughts

Based on my analysis it is clear that the analysts' choice to raise Procter & Gamble's stock price is justified. The company has shown satisfactory performance in the last quarter and it is expected that this performance will further improve in the future due to the rising demand for the company's products; especially in developing economies and due to the productivity and cost saving plans. In my opinion purchasing the company's stock is a good option for long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.