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Executive Summary

  • Procter & Gamble (NYSE:PG) is not suitable for either the Defensive Investor or the Enterprising Investor.
  • The market is implying an earnings growth estimate of 5.97%, above the historically demonstrated growth.
  • The company is overvalued at this time based on the ModernGraham valuation model.
  • Value investors should research other opportunities at this time.

Procter & Gamble is a staple company that many investors turn to simply because of its long history and demonstrated success; but Intelligent Investors must evaluate every opportunity to determine if the company is trading below its intrinsic value. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Yahoo! Inc. fares in the ModernGraham valuation model.

PG Chart

PG data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - FAIL
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$78.03
MG Value$44.92
MG OpinionOvervalued
Value Based on 3% Growth$55.33
Value Based on 0% Growth$32.44
Market Implied Growth Rate5.97%
NCAV-$17.00
PEmg20.45
Current Ratio0.89
PB Ratio3.05

Balance Sheet - 12/31/2013

Current Assets$27,467,000,000
Current Liabilities$30,727,000,000
Total Debt$21,517,000,000
Total Assets$142,927,000,000
Intangible Assets$87,888,000,000
Total Liabilities$73,549,000,000
Outstanding Shares2,711,410,000

Earnings Per Share

2014 (estimate)$4.21
2013$3.86
2012$3.12
2011$3.93
2010$3.53
2009$3.58
2008$3.64
2007$3.04
2006$2.64
2005$2.66
2004$2.32
2003$1.85

Earnings Per Share - ModernGraham

2014 (estimate)$3.82
2013$3.61
2012$3.51
2011$3.66
2010$3.44
2009$3.30

Dividend History

PG Dividend Chart

PG Dividend data by YCharts

Conclusion:

Procter & Gamble is not suitable for either the Defensive Investor or the Enterprising Investor. For the Defensive Investor, the company's current ratio is too low and it is trading at PEmg and PB ratios that are too high. For the Enterprising Investor, there is too much debt relative to the company's current assets. As a result, value investors may wish to research other opportunities, such as by reviewing ModernGraham's valuation of Colgate-Palmolive (NYSE:CL) and ModernGraham's valuation of Johnson & Johnson (NYSE:JNJ).

From strictly a valuation standpoint, the company has grown its EPSmg (normalized earnings) from $3.30 in 2009 to an estimated $3.82 for 2014. While this growth supports the company's continued raising of the dividend, it does not support the market's current implied earnings growth estimate of 5.97% and as a result the ModernGraham valuation model returns an intrinsic value that is below the market's current price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Procter & Gamble? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Procter & Gamble (PG) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Annual Valuation Of Procter & Gamble