Procter & Gamble: Value Bargain or Dud?

If there is a modern definition of a superior value investment, it would be a company with a successful brand and good products that is going through a rough stretch of business. Not surprisingly, a lot of people are wondering if the venerable American consumer products giant Procter & Gamble (NYSE: PG) fits into this category.

Chart watchers know that P&G has been having a lot of troubles in the last year; in particular, its revenues have collapsed. In June 2014 the company reported a TTM-revenue of $83.72 billion; by June 30, 2015, that number had fallen to $76.89 billion. That makes for a loss of $6.83 billion in revenue. The company also reported quarterly year to year revenue growth figure of -19.68%.

A Classic Value Investment

Yet some of the other second quarter 2015 figures at Procter & Gamble are very good from a value investing standpoint. These appealing numbers include:

  • Diluted earnings per share number of 2.43.

 

  • A net income of $7.036 billion.

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  • A profit margin of 2.93%.

 

  • A forward dividend yield of 3.51%.

 

  • A dividend yield of 3.46%.

 

  • A payout ratio of 103.6%.

 

 

  • A free cash flow of $2.714 billion.

 

  • A return on equity of 10.97%.

Despite the revenue loss, Procter & Gamble is still a very good stock that I would consider a classic value investment. It is relatively cheap at -$75.48 a share on August 7, 2015, and it looks undervalued. On August 7, 2015, Procter & Gamble had a market cap of $204.78 billion and an enterprise value of $223.51 billion.

Tremendous Brands

An even more important consideration from a value-investment standpoint is that P&G’s business is still very good. In particular, it still owns some of the most valuable consumer brands around.

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Take laundry detergents. P&G owns that market in the United States. The number one laundry detergent in America is Tide. According to Statista, sales for Procter & Gamble’s Tide were more than twice those of the closest rival, Gain, which is also a P&G brand. P&G’s brands still account for around 60% of the laundry detergent market in the U.S., according to The Wall Street Journal.

For the record, P&G sold $1.195 billion worth of Tide and $545.9 million worth of Gain. Their closest competitor was All, which is manufactured by the privately-held Sun Products Corporation. Sun sold $317.2 million worth of All, making it a distant third on the list of the 20 top selling U.S. detergents.

Interestingly enough, some of the other top selling U.S. detergents included Tide Plus Febreze, which came in fifth with $261.5 million in sales; Tide Plus a Touch of Downy, which came in sixth with $243.3 million in sales; Tide Plus Febreze Sport, which came in 10th with $119.9 million in sales; Gain with Febreze, which came in 11th with $115.6 million in sales; and Tide Simply Clean and Fresh, which came in 17th with $74 million in sales.

Despite its problems, P&G is still a consumer products juggernaut in some markets with few rivals. Tide alone accounts for 39% of the laundry detergent sold in the United States, The Journal reported. In the laundry detergent market, it faces no real threat from private labels, which only had sales of $132 million, according to Statista.

Procter & Gamble looks poised to continue its dominance of the laundry detergent market, a state of affairs that is likely to be strengthened by the rise of online retailers like Amazon.com (NASDAQ: AMZN), which make it easier than ever for consumers to buy popular name brands.

Based on its laundry detergent performance alone, P&G looks like a classic Warren Buffett buy. It makes a lot of money through its dominance of a very unglamorous segment of the market.

Tide also passes Buffett’s famed idiot litmus test; that is, its business is so simple that even an idiot could run it. As a consumer product, Tide is a no-brainer with a great loyal following.

Some Shrewd Moves

P&G’s management is also making some very shrewd moves. It has decided to get out of the unstable and cost intensive cosmetics, haircare and fragrance business, selling 43 beauty brands to Coty (NYSE: COTY) for $15 billion.

This enables Procter & Gamble to focus on its core business at a time when it is facing a strong challenge from Henkel’s (OTC: HENKY) Persil. Persil, which is popular in Europe, is being sold at Walmart Stores Inc. (NYSE: WMT) in the United States for the first time this year.

Persil ProClean Power Liquid 2-in-1 actually beat all the other brands in Consumer Reports’  tests of laundry detergents. Currently Persil is only available at Walmart locations. ABC San Francisco reported that Henkel plans to start selling Persil at stores other than Walmart sometime later this year but did not say what stores.

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The appearance of Persil in the USA could be a problem for P&G because Walmart accounts for 14% of P&G’s sales in the United States, according to our friends at The Wall Street Journal. One has to wonder if Persil’s appearance and P&G’s revenue drop are not a coincidence.

Henkel is already aggressively marketing Persil with coupons and other deals. The German detergent could be a real challenge to Tide if it starts cropping up at other major retailers such as Amazon.com, the various Kroger (NYSE: KR) supermarkets, Target (NYSE: TGT) and dollar stores such as the fast-growing Dollar General (NYSE: DG).

Despite its problems and new competition, P&G still looks like a really good company and a classic value play. Its dominance in America’s laundry detergent market definitely makes this a company to buy and hold for a long time.