(By Mani) Shares of Procter & Gamble Co.
) have rallied in recent days since news reports surfaced last Thursday that Bill Ackman's Pershing Square Capital Management has taken a stake in the company, one which Ackman describes as his largest initial position ever.
As expected, the shares responded positively, rising 6 percent till Monday, as Ackman is both highly regarded as an investor and has a history of shareholder activism.
Though, the stock may continue its upward rally, there doesn't appear to be a magic bullet that will solve P&G's problems, which are structural in nature.
"Thus, we suggest investors opportunistically use any material strength in the shares to move into better positioned consumer names." Oppenheimer analyst Joseph Altobello said in a client note.
Although it may look like the simple solution to P&G's woes is more cost cutting and lower prices, these issues are just manifestations of deeper issues. The CEO's vision does not have broad-based acceptance as complex reporting lines create weak levels of accountability, a slow-moving culture, and marketing messages that are off mark.
P&G, which is the largest US-based household products company with about $80 billion in annual sales, had announced a major restructuring program this past February designed to achieve $10 billion in savings by fiscal 2016.
Rather than advocate for a break-up of the company, Ackman could call for accelerating cost savings, or perhaps an even bigger restructuring program, which would also likely be positive for the stock.
In addition to management changes, a break-up of the company and additional cost savings, or Ackman could pursue is the divestiture of underperforming businesses.
P&G sold a number of nonstrategic businesses in recent years, including Folgers coffee to J.M. Smucker (NYSE:SJM) in 2008, pharmaceuticals to Warner Chilcott (NASDAQ:WCRX) in 2009) and Pringles snacks to Kellogg (NYSE:K) this past May.
P&G's competition is likely to benefit from internal distraction/disruption at the company over the coming quarters, something that is already plaguing the company as a result of its restructuring efforts.
The situation at P&G, whose top brands include Pampers, Ariel, Pantene, Mach3, may take some time to improve, and investors should take positions in the competitors such as Church & Dwight Co., Inc. (NYSE:CHD), Clorox Co. (NYSE:CLX), Colgate-Palmolive (NYSE:CL) and Kimberly Clark Corp.(NYSE:KMB).
All the above firms have delivered consistent organic sales growth in the past few quarters and has out performed P&G when it comes to introducing meaningful product innovations in a timely manner and managing the price/value equation with consumers
In addition, shares of Church & Dwight, Colgate-Palmolive and Kimberly Clark have increased 40 percent, 30 percent and 20 percent, respectively, in the past one year compared to P&G's 1 percent.