Procter & Gamble: Another Activist

| About: The Procter (PG)
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Summary

Trian Partners bought just one stock in the last quarter -- P&G, its biggest investment ever.

This comes as the company has already faced a battle with Bill Ackman.

Trian's thesis is likely different and might include a varied approach to slimming down and growing this conglomerate.

Procter & Gamble (NYSE:PG) finally has an activist investor -- another one, that is -- its second in just five years. Bill Ackman's Pershing Square Capital had showed up in 2012 pushing for a new CEO. He sold his underperforming stake in 2014. Since then, PG has been its own activist of sorts. But, for a $200+ billion market cap company, growth remains hard to come by.

Nelson Peltz and his Trian Fund only found one stock worth buying last quarter, PG. Trian now has a $3.5 billion stake in PG -- its biggest stake in any company ever. It's been a gross laggard and Trian could be just what PG shareholder need/hoping for. The return for PG shares over the last three years has been half (+15%) of what the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) has managed, a 29% return.

Already Making Moves

PG has already become its own activist of sorts. A big part of that being its own initiative to sell off 40 beauty brands last year that had been underperforming. Since Ackman and Pershing sold their stake in 2014, PG hasn't been afraid to let go of major brands, having sold the likes of Duracell, Clairol and Covergirl.

PG guided full-year organic sales for 2017 to be down between 2% and 3%, below previous expectations of 2% growth. And core EPS is expected to be up in the mid-single digits. Part of the bigger issue is pressure in international markets -- notably Russia, Argentina, etc.

And key brand sales could be "better." Something bigger needs to take place to truly turn this $200+ billion market cap company into more of a growth story. This includes a full spin-off of its entire beauty products business.

The beauty and healthcare business has been a bright spot for PG -- accounting for 30% of company sales and including brands like Vicks, Oral-B, Head & Shoulders and Olay. That would leave the household products business. Such a breakup already has a precedent in the market when Energizer did the exact breakup in 2015, forming a personal care business as Edgewell Personal Care (NYSE:EPC) and leaving the household products company as Energizer Holdings (NYSE:ENR).

So one key thesis for Trian might well be the major breakup that some have called for in the past. But even breaking up a $200 billion company into two $100 billion doesn't accomplish much in figuring out how to boost growth. Energizer's two companies are both under $5 billion in market cap.

Plus, PG likely does have major benefits come it comes to infrastructure and global distribution. Trying to split the company up likely won't be Trian's key focus. And it still has a relatively new CEO, David Taylor. Though, granted, he's been with PG for 35 years -- he took over for AG Lafley in fall 2015 and has been instrumental in shedding underperforming brands. A management shakeup likely isn't in the works. However, Trian might come knocking for a board seat, with the nomination deadline being June 13.

One likely thesis (or at least recommendation) form Trian will be to get PG to become more aggressive in dumping its less profitable or non-core brands, such as Braun, Bounty or Charmin, to focus on the big money makers like Tide and Gillette. Trian will likely also pull a page from the playbook it used at Mondelez (NASDAQ:MDLZ), focusing on cost cutting and using zero-based budgeting. That means every expense has to be justified each and every period.

What about the flip side? PG has been selling many of its businesses and reduced its portfolio handily. However, could the "fix" for PG's underperforming stock price and lackluster earnings growth be a major acquisition? The company has been in an acquisition drought hiatus since 2012 and hasn't spent any sizable money on a buyout since buying Gillette for nearly $60 billion 12 years ago. The startup world has been quickly eating away at market share for major consumer staples brands like PG.

So, PG might be going about this fixing of its business all wrong. Instead of cutting the R&D budget, which it did last year, perhaps it should be making bold moves to capture more of the fast-growing markets -- i.e., recall that Unilever (NYSE:UL) bought up Dollar Shave Club for $1 billion last year. Also, PG could tap into the low-cost market, potentially buy up competitor Church & Dwight (NYSE:CHD). Low-cost products are advantageous in the current market, where younger shoppers are showing no signs of brand loyalty.

In the end, I expect Trian's PG investment to be much like the one at General Electric (NYSE:GE). They didn't come out overly aggressive and instead offered some positive feedback and guidance. The "guidance" for PG will likely fall along the lines of a revamped cost-cutting program, a plan to shed certain brands and even look at some strategic M&A opportunities to better position PG for the current shopping environment. If Trian's presence at PG is as positive as it's been at GE, PG shareholders are in for a solid year.

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

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.