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Is Procter & Gamble Worth The Gamble?

 February 12, 2013 10:40 AM

(By Mani) Shares of The Procter & Gamble Company (NYSE: PG) have increased 8 percent since reporting its December quarter results and 24 percent since Bill Ackman disclosed his stake in the company. The consumer goods major has outperformed the market by 11 percent and its peers by 9 percent as investors seem to be pricing in significant future improvement in the company's fundamentals.

But, let's see whether the company's fundamentals warrant the share price upside as it seems that PG shares are getting credit for cost saving driven EPS beats while PG's top line continues to struggle.

Investors are gauging P&G's progress on the number of businesses that are either holding/growing market share. Based on this calculation, it is apparent that P&G is making progress, moving from 30 percent of businesses "growing or holding share" a few quarters ago to 50 percent on a global basis and closer to 60 percent in the US for the December quarter.

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However, the company is only capturing the breadth of its share situation, not the depth. For example, if half of P&G's business is growing 1 share point and the other half is down 5 share points, P&G's metric would imply that 50 percent would be holding/growing share.

A review of the company's 10-Q shows that P&G's actual global share position has not really improved over the past few quarters as global share losses over the past few quarters been consistently around 30 basis points. For instance, P&G's Grooming, Beauty business has trailed Unilever's.

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"With P&G's share levels still deteriorating, competitors likely set to step up spending due to improving gross margins," UBS analyst Nik Modi wrote in a note to clients.

Moreover, with 2 consecutive quarters of EPS beats, investors are starting to expect more "beat and raise" quarters ahead. However, rising raw material costs, marketing expenses and potential disruption from any organizational design changes may deter P&G from delivering strong results.

P&G's valuation is also a concern. Despite PG's weak organic top-line and EPS growth relative to competitors, the stock trades at about 18 times its 2013 consensus estimates. Rival Unilever (NYSE:UL), which has better fundamentals than P&G are trading 17 times its 2013 earnings estimate. P&G is also in-line with Unilever's on a growth adjusted basis with a PEG of 2.2 times.

"Given the fundamental profile of PG relative to global peers we cannot recommend investors commit fresh capital to the name at this time. For investors looking for HPC Titan exposure, we recommend Reckitt Benckiser and Unilever," Modi noted.



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