Procter & Gamble's Valuations Stretched Like A Well Used Pamper

| About: The Procter (PG)
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Summary

P&G is transitioning.

The flight to safety has stretched valuations in P&G.

P&G is still facing headwinds.

Procter & Gamble (NYSE:PG) has some really good products, a safe dividend and is in a lot of markets. It is currently concentrating on being the best in 10 (of 40) product categories with 65 brands and expects to whittle that down to 4 categories (infants, fabric, hair and grooming). The new CEO, David Taylor, a 36-year P&G veteran, has promised change at the powerhouse and is in the process of delivering it.

2015 was a pretty bad year financially for the company as illustrated in the below financial numbers taken from the company's "2015 Fact Sheet":

  • Net sales were down 5% from 74,401 (2014) to 70,749 (2015)
  • Operating income down 21% from 13,910 (2014) to 11,049 (2015)
  • Net earnings from continuing operations down 22% from 10,658 (2014) to 8,287 (2015)
  • Net earnings/loss from discontinued operations down 201% from 1.1B gain (2014) to a 1.1B loss (2015).
  • Net earnings attributable to P&G down 40% from 11,643 (2014) to 7,036 (2015).

These results have been negatively affected by the strong USD. The dollar has weakened some over the last few weeks, but I suspect the weakness will not last. Rates are going negative or lower in many parts of the world and are staying flat or going up in the US. This normally results in USD strengthening.

Over the last year, investors have fled risky assets in favor of less risky assets such as PG. This trend has accelerated since the beginning of this year, with PG up 4.6% YTD and the S&P down 5.43%.

Investors fleeing to safe havens have stretched the valuation of P&G as well as other consumer staples. P&G is currently trading at a P/E of 26.7. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is trading at a P/E of 31. In the table below, created with data from Morningstar, I compare P&G to a few other names. I've included some consumer staple names at the bottom. All of the consumer staples seem a bit stretched to me.

Company PE PB PS Div Yield Forward PE PEG Ratio
PG 26.7 3.7 3.3 3.2 20.1 3.2
GOOG 31 4.1 7 0 18.1 1.7
AMGN 17.6 4 5.3 2.2 12.3 2.2
XOM 17.3 2 1.2 3.6 19.4 0
GS 9.9 0.8 2 1.7 8.1 2.6
PEP 27.1 12.1 2.3 2.8 19.4 3.5
KO 27.9 7.3 4.3 3 20.5 3.4
MO 22.7 41 6.3 3.6 18.5 2.6

P&G has some enviable assets and market positions that other companies would like to have. It also has a number of issues going forward:

P&G operates in a very competitive space

New entrants are always nipping at its heals. Existing large competitors are trying to take share. How many new razor companies are there?

Currency issues

The currency issues have subsided a little recently. USD is unlikely to weaken much further and I'd suggest it is much more likely to strengthen from here.

Rising transportation costs

Lower oil prices have helped lower transport costs but a shortage of drivers in the US has helped increase those costs. Eventually, the price of oil will recover further, increasing P&G's transport costs.

Company in transition

Big transitions take time, are hard to get right, and often have substantial problems. Transitions tend to have adverse affects on moral and productivity.

Valuation

P&G trades at multiples approaching those of Alphabet with much lower expected growth rates. It currently trades at a premium to the broader market (PG 26.7 vs. S&P 18.1).

As the market recovers and risk appetite returns, P&G should return to a multiple closer to the broader market. P&G does have an attractive yield with a solid dividend but multiple contraction should be expected.

P&G's stock was once a nice place to stay safe and dry, but like a Pamper once it's been stretched, it's time to take it off.

Supporting Documents

  1. PG2015.pdf

Disclosure: I am/we are long GOOG, GS, PEP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm considering buying put options on PG in the coming days.