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In this article I take a look at Procter & Gamble (NYSE:PG) and Wal-Mart (NYSE:WMT), two companies that may offer investors upside potential that outweighs the risks.

We'll use the management effectiveness ratios, book value-share, price-sales and price-book value, etc, to evaluate Procter & Gamble and Wal-Mart.

Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.

European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain.

Rating System

Buy - Be long

Neutral - No position

Sell - Be short

(The ratings, research and analysis in this article should be considered as starting point for further research.)

Procter & Gamble - Buy

Investors should accumulate shares of Procter & Gamble on valuation. Book value-share has been flat over the past few quarters and management is effective based on the management effectiveness ratios.

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are less than current liabilities; the firm isn't very liquid. The financial leverage ratio is roughly two.

Total revenue in the first quarter, compared to the year-ago quarter, increased.

In the first quarter of 2012, earnings were high quality; further, cash from operations was enough to cover cash used in investing and financing.

Although, the macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline further. Procter & Gamble's valuation suggests limited downside.

Some investors may want to protect long positions by buying put or selling call options.

Company v. Industry

  • Return on Assets (NYSE:TTM): 7.09 v. 0.40
  • Return on Investment : 8.86 v. 0.55
  • Return on Equity : 14.25 v. 0.80

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Book value-share declined slightly from the first quarter of 2011.

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The share price has declined recently and may be near a trough.

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Price-sales is declining and near the low of the year; Procter & Gamble is undervalued relative to its recent past.

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Price-book value is near the 2011 low, the valuation metric is indicating undervaluation.

Wal-Mart - Buy (reduce exposure)

Investors should reduce exposure to Wal-Mart on valuation. Book value-share has been increasing over the past few quarters and management is effective based on the management effectiveness ratios.

According to the firm's financial statements, current assets increased in the first quarter of this year compared to the fourth quarter of 2011. Additionally, current assets are less than current liabilities; the firm isn't very liquid. The financial leverage ratio is roughly 2.5.

Total revenue in the first quarter, compared to the year-ago quarter, increased.

In the first quarter of 2012, earnings were high quality; further, cash from operations was enough to cover cash used in investing and financing.

The macro-economic risks from potential fiscal consolidation in the U.S. and European Union could cause valuations to decline.

Some investors may want to protect long positions by buying put or selling call options.

Company v. Industry

  • Return on Assets : 8.75 v. 6.31
  • Return on Investment: 13.79 v. 9.75
  • Return on Equity: 24.01 v. 16.44

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Book value-share is increasing; the increase is considered bullish.

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Wal-Mart's share price may be near a peak; a retracement to $60 or below should occur in the next few months.

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Price-sales is increasing and may be near a peak; in other words, Wal-Mart is overvalued relative to its recent historic valuations.

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Price-book value is increasing and may be near a peak; in other words, Wal-Mart is overvalued relative to its recent historic valuations.

Macro Environment


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ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.

The pace of job growth has slowed in recent months and may stabilize at low levels.


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CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.


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European Union services PMI is declining and should increase in the coming months.


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European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.

Source: Valuing Procter & Gamble, Wal-Mart

Additional disclosure: Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.