(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of UL)
The Procter & Gamble Co. (PG) has struggled in 2017, with shares only up 9 percent, underperforming the S&P 500 Index by nearly five percentage points. It also got dragged into a proxy fight with activist investor Nelson Peltz and his firm Trian Partners.
But things get even worse, because over the past five years, the company's stock price has climbed only 32 percent, while the S&P 500 rose by nearly 76 percent. And Procter & Gamble shares do not come cheap, at 20.5 times one-year forward earnings.
Wall Street isn't looking for much in the way of growth from the company, either, when it reports its fiscal first-quarter 2018 results on October 20 before the open of trading. Analysts are expecting revenue growth of only 1 percent, rising to $16.69 billion, from the same period last year, while earnings are expected to have grown about 4.25 percent to $1.07 a share. Unilever PLC's (UL) recent financial results spotlight P&G's most significant problems.
No Growth and Overvalued
PG Revenue (TTM) data by YCharts
Procter & Gamble is projected to have minimal revenue growth over the next three years, with revenue rising from $67.15 billion in 2018 to $71.76 billion in 2020. The company needs to find a way to drive more growth to get its stock rising again.
The stock isn't cheap, either, with a one-year forward PE of 20.5, while EPS is expected to grow by only 14.5 percent over the next three years, according to YCharts. The stock price is plagued with no growth and is overvalued, which is a recipe for being stuck in stagnation.
P&G gets nearly 45 percent of its revenue from North America and almost 23 percent from Europe. Nearly 65 percent of its total revenue is from developed markets. In contrast, rival Unilever is the complete opposite, with almost 58 percent of its income coming from emerging markets, and 43 percent coming from developed markets. That is P&G's most significant problem: it is concentrated in the slow-growth markets
Emerging Markets Are Driving Growth
When Unilever's results fell short of analyst expectations, it was because of weakness in developed markets, where sales growth declined by 2.3 percent and volume growth decline by 1.9 percent. Meanwhile, the emerging markets held steady, with sales growth of 6.3 percent and volume growth of 1.8 percent.
P&G is likely to see the same issues when it reports its first-quarter results, except it won't have the strength of the emerging markets to fall back on with the same magnitude, and that is where P&G's main issue lies.
P&G's problems are rooted in products in slow-growing markets and an overvalued stock price. The stock will likely continue to underperform until it turns its growth problem around.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.