Bank of America Merrill Lynch analysts Olivia Tong and Elyn Rodriguez issued a favorable P&G report on Monday. Their observation is that P&G plans on running a tighter portfolio, which ultimately will shed 10% of sales. The Merrill Lynch call is a reiterated Buy rating and the price target is $88 per share.
Here is why.
P&G announced plans to run a tighter portfolio of 70 to 80 core brands, or 90% of its current sales and what is supposed to be 95% of profits. P&G plans to harvest, partner or divest the rest of the brands.
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Management has said for some time that roughly 10% of the portfolio is up for negotiation. P&G is now planning to jettison these non-core businesses in the next 12 to 24 months, which should accelerate growth, improve focus and help the company overdeliver on its $10 billion cost savings plan. Achievement of those savings will be critical to help offset the stranded overhead and lost earnings to come with pruning the portfolio.
Merrill Lynch said that it had already expected a challenging quarter, given sluggish scanner trends, tough macroeconomic trends and uninspiring results from its peers. Fiscal fourth-quarter organic sales growth rounded up to 2% year-over-year. The Merrill Lynch team left its fiscal 2015 estimates of 3% growth, with the assumption that growth improves from up 2% to up 3% as the year progresses. They believe that this is the right growth algorithm for the company, as it provides management with the flexibility to spend to revitalize its brands, with potential to deliver upside when (or if) macro trends improve.
The report further showed that soft results are well telegraphed. The analysts expect investor sentiment to be tied to market share performance. The analysts reduced their fiscal year 2015 earnings per share estimates by only $0.03 to $4.44, with slight cuts to their sales and margin forecasts.
Merrill Lynch’s take after sluggish results is that P&G is starting to take action after a disappointing year. The firm’s $88 price target is based on 17.2 times its 2015 earnings estimate. The analysts also see a relatively low valuation, versus historicals and versus its peers.
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Lastly, the 3.3% yield from P&G is expected to provide downside protection.
24/7 Wall St. wanted to see how Merrill Lynch’s outlook stacks up against its other brokerage and analyst peers against its own $88 price target. The consensus analyst price target is $87.26, and the highest analyst price target is still all the way up at $97.
On Monday, P&G shares had given back 1% and were down at $78.81 in the noon hour. Its 52-week range is $73.61 to $85.82.
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