ModernGraham Valuation: Proctor & Gamble (PG)


Company Profile (obtained from Google Finance): The Procter & Gamble Company (P&G) is focused on providing consumer packaged goods. The Company’s products are sold in more than 180 countries and territories around the world primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, e-commerce and high-frequency stores, the neighborhood stores which serve many consumers in developing markets. As of June 30, 2013, the Company has five reportable segments: Beauty; Grooming; Health Care; Fabric Care and Home Care; and Baby Care and Family Care. Sales to Wal-Mart Stores, Inc. and its affiliates represent approximately 14% of its total revenue during the fiscal year ended June 30, 2013 (fiscal 2013). In October 2012, the Company acquired its partner’s interest in a joint venture in Iberia that operates in its Baby Care and Family Care and Health Care reportable segments.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (explanation of the ModernGraham valuation model):

Key Data:

MG Value $45.53
MG Opinion Overvalued
Value Based on 3% Growth $55.53
Value Based on 0% Growth $32.55
Market Implied Growth Rate 6.65%
NCAV -$17.19
PEmg 21.81
Current Ratio 0.79
PB Ratio 3.33

Balance Sheet – 9/30/2013 (an Introduction to the Balance Sheet)

Current Assets $26,322,000,000
Current Liabilities $33,217,000,000
Total Debt $18,480,000,000
Total Assets $141,125,000,000
Intangible Assets $87,589,000,000
Total Liabilities $73,038,000,000
Outstanding Shares 2,718,230,000

Earnings Per Share – Diluted

2014 (estimate) $4.25
2013 $3.86
2012 $3.12
2011 $3.93
2010 $3.53
2009 $3.58
2008 $3.64
2007 $3.04
2006 $2.64
2005 $2.66
2004 $2.32
2003 $1.85

Earnings Per Share – Modern Graham

2014 (estimate) $3.83
2013 $3.61
2012 $3.51
2011 $3.66
2010 $3.44
2009 $3.30


Proctor and Gamble has a very poor current ratio, which is a key fundamental analysis ratio in the requirements for Benjamin Graham Intelligent Investors.  For Defensive Investors, the current ratio combined with the high PEmg and PB ratios eliminates this company from potential investment.  For Enterprising Investors, those who are able to take on higher risk through further research, the company still qualifies as a possibility due to stable earnings growth and a strong dividend.  From a valuation standpoint, however, the company appears overvalued.  While earnings have consistently grown from an EPSmg (normalized earnings) of $3.30 in 2009 to an estimated $3.83 for fiscal year 2014, that growth is only at an average of 2.26% per year.  The market is implying a growth rate of 6.65%, well over what has been seen historically.  As a result, any Enterprising Investor considering investing in Proctor & Gamble should do considerably more research to determine if it is a good time to invest in the company.

What do you think?  Is Proctor & Gamble overvalued?  Should the company only be considered suitable for Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Proctor & Gamble at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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