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Stock Strategist

Investors Stand to Clean Up With This Wide-Moat Firm

By recharging its brand mix and leveraging its scale, P&G is stabilizing its competitive edge.

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We believe  Procter & Gamble (PG) represents an attractive investment opportunity in a sector where discounts are few and far between. The firm has faced its share of challenges over the past several years. Even beyond the tough macro environment, where consumer spending has been ratcheted back and the competitive landscape has intensified, lackluster innovation and an attempt to overextend its geographic reach plagued P&G's financial performance and subsequently its share price. However, we now believe that recent investments behind new products, a more disciplined expansion plan, and efforts to rightsize the brand mix while improving the efficiency of operations appear to be gaining traction. As such, we contend that P&G is poised to post accelerating top-line growth as well as improving profitability metrics over the next several years.

We've long regarded P&G as a wide-moat giant that enjoys the benefits of scale with an extensive global manufacturing and distribution network and unprecedented brand reach. P&G is the leading consumer product manufacturer in the world, with more than $80 billion in annual sales. Its wide economic moat derives from the economies of scale that result from its portfolio of leading brands, 23 of which generate more than $1 billion in revenue per year and another 14 of which generate between $500 million and $1 billion in sales annually. Given the dominant market positions in its categories (the company cites it maintains over 30% of baby care, 70% of blades and razors, more than 30% of feminine protection, and in excess of 25% of fabric care), P&G is an important partner for retailers to drive traffic in their stores. Further, the size and scale P&G has amassed over many years enable the firm to develop meaningful cost advantages, resulting in a lower unit cost than its smaller peers. Overall, we forecast returns on invested capital (including goodwill but excluding excess cash) to average 16% over our 10-year explicit forecast, well in excess of our 7.4% cost of capital, solidifying our wide Morningstar Economic Moat Rating.

Erin Lash does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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