P&G Is Still Below Par

English: Logo for Procter & Gamble. Source of ...

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Last week Procter & Gamble (NYSE: PG) announced that it was going to reorganize the company from the current five-arm management structure into four divisions. The company also announced that in the process it plans to trim its workforce by about 4,000 employees by 2016, which also follows another 1,600 staff slated to lose their jobs in 2013. P&G, which will be cutting its workforce for only the second time in its 175-year history, seeks to reduce the heavy marketing and manufacturing costs that have cannibalized so much of its profits.

Interestingly, P&G’s gross, operating and profit margins are way above those of major rivalUnilever (NYSE: UL). Nonetheless, analysts and investors have consistently picked out P&Gs huge inefficiency in cost management as a major weakness, reports Wall Street Journal. P&G is up 12.5% YTD, and trades at about 17.47 times in P/E. Following the announcement on Thursday last week, shares of the company rallied 3%, an indication that investors were very impressed with the move.

Twenty new plants, same workforce?

The company also seeks to open 20 new manufacturing plants concentrated mainly in the BRIC economies, with China, South Africa and Brazil being primary targets, as well as Romania and Poland. The company intends to increase production in emerging economies, as they account for a majority of its revenues.

Additionally, countries like China and Brazil have already demonstrated a growing appetite for household products. Effectively, P&G will also need to hire new staff for the new manufacturing plants, which should range between 3,000 and 5,000. This seems to wipe out the number set to see the door by 2016, which represents an interesting scenario. It is as if P&G is opening 20 new manufacturing plants (bar the difference in salaries) without having to increase the payroll.

Restructuring benefits

For me, the biggest benefits for P&G will emanate from the fact that the company will be able to generate more sales without having to increase payroll costs. P&G is by far one of the most efficient companies when it comes to the amount of revenue, EBITDA, and earnings generated by each employee. By adding twenty new manufacturing units to be staffed with a number workers smaller than the one departing means increased revenue per staff member, and consequently, EBITDA and earnings.

Revenue, EBITDA, and earnings conversion per employee the best compared to rivals

Compared to its fiercest rival, Unilever, P&G has only 126,000 against a trailing 12-month revenue of $83.72 billion, while the London-based Unilever has 173,000 employees, yielding $66.45 billion in revenues. Kimberley-Clark (NYSE: KMB), on the other hand, has 58,000 staff members with a return of $21.14 billion revenue.

The subsequent revenue return per employee is about $664,000 for P&G, as compared to Unilever’s $384,000 and Kimberley-Clark’s $364,000. The same statistic is replicated in EBITDA and earnings, which makes P&G the most attractive stock in its industry in that respect–P&G is leading with about $156,000 for EBITDA and about $90,000 in earnings per staff member. Unilever’s figures stand at about $61,000 and about $34,000, respectively, while Kimberley-Clark’s EBITDA and earnings per staff member stand at $72,000 and $31,000, respectively.

My analysis indicates that the P&G workforce does not weigh much on its profits as compared to its competitors. However, according to the WSJ article noted above, the company has also sought to cut marketing expenses by about $6 billion. This should result in further upside, especially on EBITDA and earnings. Overall, including the staff cuts and marketing expenses, P&G looks to pocket $10 billion in cost savings by 2016, adding that to the $19.7 billion in EBITDA, which gives me nearly $30 billion worth of EBITDA, or $10.95 EBITDA per share, assuming a growth rate of zero for the EBITDA.

Valuation

With a price to earnings ratio of 2.52 times, P&G is slightly more expensive than Kimberley-Clark. However, based on the company’s fundamentals, as analyzed, P&G has the best outlook, and therefore provides more value for money to the investor, than does Kimberley-Clark. On the other hand, Unilever’s earnings are expected to decline going forward. However, in terms of P/E ratio, the U.K-based company is still expensively priced with a P/E of 20.64 times, as compared to P&G’s 17.47 times.

The bottom line

At 12.5% upside YTD, and trading at a P/E ratio of 17.47 as compared to the industry average of 23.61, P&G has a long way to go northwards. There is nothing to hold investors back now that the company has promised to reorganize its organizational structure and consequently trim spending on marketing and payroll, while expanding production in the most promising regions. There is no better time to buy this large cap stock, which, above all, promises stability and minimum risk.

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One Response to P&G Is Still Below Par

  1. Joab Khamala says:

    Very interesting and on point. However, For my Investment Philosophy, I never use EBITDA, P/E’s. I will give you a scenario. Since launching my portfolio in November 2007, I have guided several Hedge Funds to return of 57-71% compared with the 34 per cent gain from the MSCI World index. This has placed some of my Funds in the top 1 per cent of their Global sector of more than 500 competitors over the same period.
    To achieve this, I have been following investment approach that demands companies in my portfolio generate cash, reinvest that in order to grow, do so without becoming indebted, and have a resilient business model. Illustrating the first two requirements, let us draw a distinction between WD-40 (NASDAQ:WDFC) and Coca-Cola (NYSE:KO). Although the maker of the oily lubricant boasts better margins than the purveyor of fizzy lubricants, it is unable to reinvest those proceeds in new brands or products in the way that Coca-Cola does. It’s a high-yield bond, not equity. So while shares in the firm have risen by an impressive 1,989 per cent since 1978, Coca-Cola’s stock has surged by 5,507 per cent over the same time.
    I also urge investors to reconsider how they value companies. I never use price/Earnings ratio, nor should they, The reason is that not all Es are equal, accounting treatments meant not all earnings materialised as cash, so I value firms by their free cash flow yield instead. Furthermore, I try to avoid considering a company’s management team when assessing it for investment. I always buy a business that could be run by an idiot, because sooner or later it will be run by one.
    For instance suppose that, without Steve Jobs, Apple (NASDAQ:AAPL) would struggle to produce the returns it had in the past; investing in the business only because of his influence would therefore have been a mistake. Although, Investors need to keep an eye on management, though, in case they went ‘mad’ when reinvesting profits, such as by embarking on acquisition sprees.
    Finally, a business’s resilience could be judged by both its history and the susceptibility of its industry to being disrupted. On the first point, some of the drinks companies in my portfolio have survived Prohibition. Surviving your product being made illegal is a good sign of resilience.
    And on the latter issue, I usually express my preference for industries I readily understand. If I owned Yahoo! would I have spotted Google? No, nor would I have spotted Apple if I had owned Sony. Conversely, if I have interest in the Finnish lift-maker Kone, (HEL: KNEBV): I’m unlikely to be blindsided by a new way of moving people up and down a building.
    Broadly, do not attempt to pick emerging winners. I’m trying to bet on the horse race after it’s been won, which the stock market occasionally lets me do. I thus eschewed ‘the sex and violence end of equity markets’, as Smith once put it. Other investors do not adhere to such principles, and end up making losses. The fund managers, I sometimes encounter would invest in any old rubbish. This is attributed to a range of causes, from the fact that, a broker bought them lunch, to a manager’s belief in a turnaround story for a company. People buying a company have their common sense surgically removed. They will look at the return they get on their bank account, but not their investments in companies. Even with contrarian investments, I doubt the sense of taking on the risks. While fund managers are waiting for the event that will change the share price, while every day the company is losing its intrinsic value.
    An example is the Airlines industry, historically these have borrowed at a rate of around 7%, but used the debt to conjure a return less than half that cost; the industry had lost tens of billions each year while fund managers waited for the wave of consolidation in the sector that would create value. How do these industries keep going?’ it is because we keep sending them money. What if we stop?

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