Procter & Gamble (PG): Solid as always ~ market folly

Friday, April 25, 2008

Procter & Gamble (PG): Solid as always

PG: Solid as always
Posted 0 days ago on 4/24/08
PG: Buy, Target Price: $72, Time frame: 6 months

In the midst of a recession, when the consumer is tapping out due to high energy costs and the plummeting values of their homes, stick to the basics. And, that's exactly what Procter & Gamble does. They are a boring, run of the mill blue chip stock. PG delivers solid, consistent returns just like JNJ. Procter & Gamble are involved with producing name brand consumer goods. They have health and beauty products, household care items, and acquired Gillette a few years back, incorporating their products to their lineup. Some of the names you will be familiar with include: Duracell batteries and Braun grooming products. As you can see, PG is simply a consumer staple play. Just like JNJ, Procter & Gamble doesn't provide you with a cool growth story to brag to your buddies about. It does, however, provide you with very consistent returns that can both preserve and grow your capital, as well as reduce your portfolio's risk.

If we are in a recession, these people still need batteries and shaving cream. If we are in a bull market, people will still need cleaning supplies and diapers. The economic environment doesn't matter because PG sells consumer staple goods. PG thrives in a bull or bear market, and that's the beauty of it. As we all have seen over the past few months, slowed growth and recession can hit your portfolio hard, so you need to be defensive. PG diversifies you into a consumer staples sector as well as reduces your risk due to its ability to function in any type of market. As I said in the beginning of this analysis, this pick is a boring blue chip with consistent returns. My main rationale for selecting PG along with JNJ in the consumer staples sector is that they have consistently strong numbers underlying their profitability. The fundamentals alone reveal why PG's stock returns are so consistent. PG has a trailing PE of 20 and a forward PE of 17, so it is technically cheaper on valuation than a competitor like JNJ. With a price to sales ratio of only 2.6, PG can be deemed undervalued by this metric (anything under 5 is considered undervalued). With a price to book ratio of only 3, PG is also slightly attractive in this facet. In this kind of environment, you have to pay a slight premium for protection. JNJ and PG offer that. PG is a solid company though with strong operating margins of 20.29% and a return on equity of 16.66%. These numbers illustrate that PG can perform well in any type of economic environment. Even in a period of slowed growth, PG is seeing 9.4% quarterly revenue growth (this number has accelerated too) and 14.3% quarterly earnings growth. Once again, slow and steady wins the race. And, that's all we need until the market can pick a direction and stop trading sideways in ranges.

Also, looking at institutional ownership of PG once again reveals that Mr. Warren Buffett loves the consumer staples sector, especially JNJ and PG as they both offer great valuation and consistent returns. Buffett's Berkshire Hathaway has an even larger stake in PG than in JNJ. They have pumped a $6.4 Billion investment into PG and it makes up 10.6% of their portfolio. Other notable institutions with very large stakes are investment bank JPMorgan, and investment firms such as Janus and Vanguard. Also, it must be mentioned that 4% of PG's shares are owned by insiders; a very strong number. Investors obviously don't need to recognize large institutional ownership as a reason to own PG, but it certainly helps convey the overall market confidence in PG. Next, let's turn to analyst coverage of PG. 11 analysts rate PG as a strong buy, 1 as a moderate buy, a 4 as a hold. As you can see, an overwhelming majority of analysts love PG. In terms of star rankings, UBS ranks PG 5 stars, while Merrill Lynch, Bear Stearns, and Oppenheimer all rate PG 4 stars. Once again, the investment banks are big fans of consumer staple plays (especially PG).

This is a boring stock to talk about because they make everyday items and don't provide astronomical growth-stock-like returns. However, PG does provide consistent gains, which I am a big fan of in an uncertain market like we are currently in. If negative economic data continues to be revealed, PG will be there to reduce your portfolio's risk and provide solid consistent gains over the long term. People need PG's products no matter what kind of market or economic environment we are in, that's the great thing about it. Its boring to talk about, its a blue chip behemoth, and you simply can't bet against them. PG is a long term value play because consumer staples will never go away.

PG: Buy, Target Price: $72, Time frame: 6 months