Procter & Gamble Faces Persistent Challenges Amid Market Shifts
Procter & Gamble’s stock remains overvalued while the company heavily relies on mature, slow-growth markets for its revenue.
(Note: The author is a financial analyst and portfolio manager who, along with clients, holds shares of UL.)
In 2017, Procter & Gamble Co. (PG) experienced modest gains, with its shares rising just 9%, trailing the S&P 500 Index by nearly five percentage points. The company also found itself embroiled in a proxy battle with activist investor Nelson Peltz and his firm, Trian Partners.
Over the last five years, PG’s stock price has increased by only 32%, significantly lagging the S&P 500’s 76% growth. Additionally, the stock trades at a premium, with a forward price-to-earnings ratio of 20.5.
Wall Street anticipates limited growth for PG as it prepares to announce its fiscal first-quarter 2018 results on October 20 before market open. Analysts forecast a modest 1% revenue increase to $16.69 billion compared to the previous year, with earnings per share expected to grow approximately 4.25% to $1.07. Unilever PLC’s (UL) recent performance highlights some of PG’s key challenges.
Data sourced from YCharts.
Limited Growth Prospects and High Valuation
Revenue data provided by YCharts.
Procter & Gamble is expected to see minimal revenue growth over the next three years, with revenues projected to rise from $67.15 billion in 2018 to $71.76 billion by 2020. To reignite stock momentum, the company must identify new avenues for growth.
The stock remains expensive, trading at a one-year forward PE of 20.5, while earnings per share are projected to increase by only 14.5% over the next three years, according to YCharts. This combination of sluggish growth and high valuation suggests the stock may remain stagnant.
Concentration in Mature Markets
Nearly 45% of PG’s revenue comes from North America, with Europe contributing almost 23%. Overall, about 65% of its revenue stems from developed markets. In contrast, competitor Unilever generates nearly 58% of its revenue from emerging markets and 43% from developed regions. This heavy focus on slow-growing developed markets is a significant hurdle for PG.
Emerging Markets as Growth Engines
Unilever’s recent earnings missed analyst expectations primarily due to weakness in developed markets, where sales declined by 2.3% and volume dropped 1.9%. However, emerging markets remained resilient, posting 6.3% sales growth and 1.8% volume growth.
PG is likely to encounter similar challenges in its upcoming quarterly report but lacks the robust emerging market exposure to offset declines in mature regions. This market imbalance is central to PG’s ongoing struggles.
In summary, Procter & Gamble’s difficulties stem from a reliance on slow-growing markets coupled with an overvalued stock. Until the company addresses its growth challenges, its stock is expected to continue underperforming.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and manages the firm’s actively managed, long-only Thematic Growth Portfolio. Kramer typically holds stocks for three to five years. For more about Kramer and his portfolio holdings, click here. The information provided is educational and not intended as investment advice. Investments carry risks and are not guaranteed. Consult a qualified financial or tax professional before implementing any strategies discussed. The adviser can provide a list of recommendations made in the past year upon request. Past performance does not guarantee future results.
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