A Slimmer Procter & Gamble Catches Analysts’ Attention

What's several dozen brands among friends? When Procter & Gamble announced last week that it plans to sell about 100 “underperforming” brands to better concentrate on its core products, the folks on Wall Street cheered the move. In fact, some analysts predict the stock will rise 11% from August 5 levels.  On Friday, Aug 1, Chief Executive Officer AG Lafley, announced plans to streamline its business to focus more on 70 to 80 of its biggest brands including the billion dollar brands like Tide, Pampers and Oral-B. Though the company did not specify the brands it plans to keep or divest, it stated that these 70 to 80 brands have accounted for 90% of company sales and over 95% of profits.

 

Over the next two years, P&G will divest or discontinue 90 to 100 brands whose sales and profits have been declining over the past three years. Reportedly, the list could even include some larger brands if they do not strategically fit into the company’s core business. Lafley believes that a smaller and more focused company should be able to grow faster, create more value and be much easier to manage. Wall Street analysts tend to agree with Lafley.

Deutsche Bank reiterated a Buy rating; the firm currently has a $90 price target on Procter & Gamble:

“Armed with considerable restructuring savings, easy sales comparisons and waning F/X headwinds, big picture trajectory from here looks compelling provided anemic category growth rates stabilize from here and desperate retailers and competitors move beyond aggressive discounting to lift volumes. With significant earnings flexibility building to reinvest in its brands and channels and most signs pointing to a US recovery on the horizon, sales and market shares should stabilize and income growth should accelerate, with stock tracking EPS growth and perhaps modest multiple expansion. Maintain Buy, $90 target.”

Canaccord Genuity reiterated a Buy rating and $89 price target:

“Management also announced a new strategy for the company which will see it exit 90-100 non-core brands over the next 1-2 years. The disposals will be slightly dilutive but they will allow the company to focus its investments more effectively, and should reduce complexity. The ongoing business will be focused on 70-80 brands across 12 units. A.G. Lafley has confirmed his commitment to the CEO role during this transition. The new strategy should deliver additional savings over and above the $10bn already identified, but these were not quantified.”

Procter & Gamble gaped higher on the Monday morning session. Based on the comments from analysts we have mentioned, the stock may appreciate from $79.65 to $89-$90, which implies 11.7 percent upside from Monday's levels.

These moves by P&G are just the latest efforts to bring its product line under control. On Friday, the consumer goods giant sold off a significant portion of its pet food business for $2.9 billion to privately-held American confectionary and pet food manufacturer, Mars, Inc. under a deal entered into in April this year. More than two years ago, in June 2012, P&G sold its snack unit, which included Pringles, to cereal maker The Kellogg Company, for $2.7 billion. In October 2009, the consumer giant sold its global pharmaceuticals business to pharmaceutical company Warner Chilcott plc to focus on the fast growing consumer oriented healthcare business. In fiscal 2013, P&G divested its underperforming bleach business in Italy and Portugal and the Braun household appliances business.

The downsizing announcement came after P&G reported mixed fiscal fourth-quarter 2014 results. The company topped earnings estimates, but missed the same for sales. Rival Unilever made a similar announcement to trim its portfolio earlier this year.

The moves by these monsters of the FMCG business brings two questions into focus: One, who will purchase these orphan brands and try to resurrect them and two, what will P&G and Unilever do with all that money? Return it to shareholders? Maybe. Upgrade existing facilities? Unlikely. Boost marketing and ad spend? Perhaps.