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Stock Strategist

P&G Stands to Pamper Investors by Shoring Up Its Wide Moat

We think the market is undervaluing this household and personal care giant's advantages.

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We don't believe the market fully appreciates  Procter & Gamble's (PG) strategic effort to slim down. In our view, by rightsizing its brand mix, the company stands to enhance its brand intangible assets and cost edge, bolstering its wide economic moat. Even a more narrowly focused P&G will carry significant clout with retailers, and by honing its resources, the firm should drive accelerating sales growth to a low- to mid-single-digit rate longer term. By parting ways with less profitable brands and reducing complexity in its manufacturing and distribution network, P&G is poised to post more than 400 basis points of operating margin expansion over our 10-year explicit forecast through improvement in both the cost of goods sold and selling, general, and administrative expense lines. Beyond this, we suspect the market fails to appreciate that a recharged P&G could hamper the competitive positioning of peer Church & Dwight (CHD), which is dwarfed in size and scale by larger operators. Judging by price/earnings, the market seems to value no-moat Church & Dwight as if it possesses a wide moat, while P&G trades as if it is devoid of a competitive edge. We believe this flawed assessment of competitive positioning in the household and personal care space creates opportunities for long-term investors looking to stock up on a wide-moat name at a discount.

Unwieldy Brand Set Has Hampered P&G's Competitive Edge
Lackluster innovation and an attempt to overextend its geographic reach plagued P&G's financial performance, and ultimately its competitive positioning, over the past several years. While brands can be a significant advantage for consumer product firms and a strong defense against some industry pressures, owners of strong brands should be able to consistently pass inflationary pressures to customers. However, this has proved elusive for P&G and household and personal care peer Church & Dwight, as both have struggled to generate price/mix at or above inflation, as measured by the consumer price index.

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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