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This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 12. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Global Research 17 April 2020
Procter & Gamble Confidently, Leading the Industry Forward
Procter issues insightful state of the industry commentary Procter's CFO and COO fielded its F3Q earnings call with a refreshingly candid account of portfolio performance and end-market insights. PG was keen to note that a global demand surge in March for at-home use products pulled-forward +2pp in sales from its (Apr-Jun) qtr, resulting in an implied FQ4 sales and EPS range below Sell-side ests. In our view, this is not a negative. Fundamentally, PG is gaining customer wallet share and is leveraging global supply chain dependability to gain mindshare w/key retailers. Though Procter is bracing for global recession, Procter is confident in its ability to grow org sales, volume, cash flow and dividend in this setting. We anticipate Street FQ4 ests to come-in, given increased FX pressure & pantry deload effects. For FY21 we anticipate global org sales to grow 2-3% as PG mentioned end-markets could slow 1pp.
Insights on PG’s portfolio performance and end-market growth By region in FQ3, the US org sales grew +10%, European Enterprise markets +15%, Lat Am +11% (price/mix +7%, w/ Mexico +6%, Brazil +3%) and India declined -8% from a halt in shopping trips (but is expected to normalize as consumers generally don’t hold much inventory and shops are expected to reopen in coming weeks). By channel, Ecommerce grew +40% in FQ3, driven by the US and China. Usage occasions in dishwashing and laundry have increased, with some categories growing 50+%, reducing volume sold on promotion -5%. Beauty in mainland China market is expected to improve sequentially in FQ4, though travel retail sales remain a partial headwind.
Assessing PG’s recession durability and long term implications In bracing for a global recession, PG’s current portfolio is now more indexed to daily use products, with value and superior function relative to its competition in the last recession. Consumer behavioral changes (more time spent at home, cleanliness standards) are long term growth drivers to PG’s end categories. With retailers now contemplating longer term SKU count reductions, Procter could benefit from lower costs from the simplification and challenger brands more at bay given shelf streamlines.
Valuation: Maintain $126 PT based on 25x P/E and 17x EV/EBITDA multiples We lower our Q4 organic sales to 0.4% (from +1.5%) and our adj EPS to $0.94 from $1.01. Our FY20 organic sales est of +4.5% and adj EPS of $4.90 are unchanged.
Household Products, Non-Durable
12-month rating Neutral
12m price target US$126.00
Price (17 Apr 2020) US$124.69
RIC: PG.N BBG: PG US
Trading data and key metrics 52-wk range US$127.14-97.70
Market cap. US$319bn
Shares o/s 2,558m (COM)
Free float 100%
Avg. daily volume ('000) 3,720
Avg. daily value (m) US$432.5
Common s/h equity (06/20E) US$46.3bn
P/BV (06/20E) 6.7x
Net debt / EBITDA (06/20E) 0.9x
EPS (UBS, diluted) (US$) 06/20E From To % ch Cons.
Q1 1.37 1.37 0 1.37 Q2 1.42 1.42 0 1.42 Q3E 1.10 1.17 6 1.12 Q4E 1.01 0.94 -6 1.07 06/20E 4.90 4.90 NM 4.97 06/21E 5.12 5.12 NM 5.22 06/22E 5.50 5.50 NM 5.60
Steven Strycula Analyst
firstname.lastname@example.org +1-212-713 1428
Carey Sloane Analyst
email@example.com +1-212-713 8695
Andrew Olsen Associate Analyst
firstname.lastname@example.org +1-212-713 9147
Highlights (US$m) 06/17 06/18 06/19 06/20E 06/21E 06/22E 06/23E 06/24E Revenues 65,058 66,832 67,684 69,699 69,547 71,717 73,991 76,343 EBIT (UBS) 14,157 14,088 14,236 15,370 16,059 17,111 18,221 19,387 Net earnings (UBS) 10,732 11,204 11,877 12,888 13,364 14,242 15,157 16,124 EPS (UBS, diluted) (US$) 3.92 4.22 4.52 4.90 5.12 5.50 5.90 6.31 DPS (US$) 2.70 2.79 2.90 3.00 3.15 3.31 3.47 3.65 Net (debt) / cash (26,023) (28,717) (25,853) (16,652) (16,272) (15,695) (14,971) (13,366)
Profitability/valuation 06/17 06/18 06/19 06/20E 06/21E 06/22E 06/23E 06/24E EBIT margin % 21.8 21.1 21.0 22.1 23.1 23.9 24.6 25.4 ROIC (EBIT) % 17.3 17.2 18.4 22.5 25.1 26.4 28.1 29.7 EV/EBITDA (core) x 14.8 14.5 15.6 18.4 17.6 16.6 15.6 14.7 P/E (UBS, diluted) x 22.3 20.1 20.8 25.4 24.3 22.7 21.1 19.7 Equity FCF (UBS) yield % 4.0 5.1 5.0 4.1 4.2 4.5 4.8 5.0 Net dividend yield % 3.1 3.3 3.1 2.4 2.5 2.7 2.8 2.9 Source: Company accounts, Thomson Reuters, UBS estimates. Metrics marked as (UBS) have had analyst adjustments applied. Valuations: based on an average share price that year, (E): based on a share price of US$124.69 on 17 Apr 2020 16:39 EDT
Steven Strycula, Analyst, email@example.com, +1-212-713 1428
Procter & Gamble 17 April 2020
Procter & Gamble Neutral (Price target US$126.00)
UBS Research THESIS MAP a guide to our thinking and what's where in this report
PIVOTAL QUESTIONS Q: Can Procter grow modestly ahead of underlying market growth of +3-3.5% long term? Yes, we forecast P&G to grow sales at least in-line with category end-markets of 3%, if not more. We model a 3-year organic sales CAGR of +3%. Our analysis credits P&G for its scale advantage which has resulted in #1 share positioning across ~88% of its top 16 U.S. categories.
"The Procter Effect” 1 year later: Measuring How HPC Peers Stack-up Against P&G " 10/10/2019
Q: Can P&G’s cost plan generate upside to Street FY21 EBIT margin? Possibly. We forecast FY21 EBIT margin expansion of +110 bps. A key source of upside will be if PG is able to deliver on its $10 billion cost plan. Three years into Procter’s second $10 billion productivity program, PG has realized $5.3 billion of the $10 billion in savings, signifying a greater cadence of cost savings coming in FY20 and FY21.
Procter's $10 billion reinvestment cycle and scale across a diverse set of CPG categories will engage profit pool battles and is likely to limit EPS upside for its most direct competitors. After undergoing organizational changes and portfolio divestitures, P&G has #1 share positioning across 88% of its top categories and has positive share changes across 69% in its top categories. We view Kimberly-Clark and Edgewell as the most exposed to PG and the largest share donors to PG as well. Given PG’s scale across the CPG space, we expect PG to maintain its leading market position and deliver growth in-line or above its category growth rates of +3-3.5%.
We leverage Nielsen data to identify category/company combinations with the most overlap to P&G, categories where PG is outperforming its peers and the category growth rate, and then identify the dollar impact to the most and least exposed companies. We then analyze portfolio divestitures and organizational changes PG has made since 2014 to assess the drivers behind its share gains and sales acceleleration.
WHAT'S PRICED IN? Consensus forecast P&G to grow +4.5% in FY20 and +2.1% in FY21. We see modest upside to these estimates. But ~25x EPS, P&G trades ~1x higher than its peers and at a 7% premium to its historical averages. And at ~17x EV/EBITDA, an 11% premium to its 5-year average, it appears the market already is crediting PG for its sales turn and continued strong top line growth.
UPSIDE / DOWNSIDE SPECTRUM
3-year organic sales CAGR
FY2020 gross margins
FY2020 EBIT margins
FY2020 adj EPS
$146 upside 3.3% 50.9% 22.7% $4.94 $126 base 2.3% 50.6% 22.1% $4.90 $104 downside 1.3% 50.4% 21.4% $4.79 Source: UBS
COMPANY DESCRIPTION The Procter & Gamble Company (PG) manufactures and markets household and personal care products on a global basis. Categories in which PG operates include laundry, cleaning,...
2018 2019 2020
17 Apr +12 mo.
P/E (UBS) Implied
EPS (UBS) 06/20E
Upside to Downside
1 to 1
Source: UBS Research
Procter & Gamble 17 April 2020
Procter & Gamble UBS Research
Notes from PG’s 3Q earnings call and follow-up call
Organic Sales shift: PG expects 2% of organic sales growth from shift from Q4 into Q3 from pantry loading. Guidance implies F4Q sales of 0% to 4% which is equivalent to -2% to +2% post the 2% shift from F3Q.
Organic Sales: 9 of 10 categories growing organic sales with broad based share gains. Org sales by region: +10% US; 14% Canada; 6% European Focus markets; 15% in