Undergraduate Program

BBA

FIN-425 – LON1
Portfolio Management
Ramesh Advani

A1
Procter and Gamble
(PG)

Santiago Corredor

Submission Due Date: 30th October 2023

Word Count: 3670
Action Summary
The results pointed to the expected value of the stock (PG) to be 169.7 USD per share. Because of
the current value of the stock representing only 148.15 USD per share, the action summary points to buy
and hold for the next 6-12 months. After which, and once the target price has been reached, the price is
expected to slightly decrease, therefore an action to sell could be recommended.

Executive Summary
Proctor and Gamble, also known as P&G, is one of the oldest companies in the US that still fully
operate up to this day. It has been historically a good representation of a stable company that has both the
experience and resources to survive through time and calamity, giving investors a secure investment with
a relatively low retention rate. Creating then value for the investors not only with the valuation that the
company is capable of creating, but also through the constant dividends it has delivered and kept in a
constant growth even through the COVID-19 pandemic. When deeply analyzing the company, it is
possible to see that P&G has a large portfolio of different products and investments that give it a large
portfolio that can be used as a safe investment. It is also possible to observe that the company operates in
more than 180 countries, making it not only an extremely diverse company based on its portfolio, but also
to have a diverse distribution through different economies. This last point being both beneficial and
potentially dangerous as the risk is reduced through the diversification of the company while also raising
the probabilities of encountering trouble while operating in developing countries where cultural and
political tangents could be found. As the company can be considered a “Value Stock” when compared to
its peers in the market as well as its potential, it represents an interesting investment for someone looking
to stay in the long term on the market.
Table of Contents
Action Summary 2

Executive Summary 2

Overview of the Company 1

Earnings Strength 1

Relative Valuation Summary 2

Peer & Industry Comparative Performance 3

Competitive Positioning 5

Investment Risks 7

Conclusion 7

References 8
Overview of the Company
Procter and Gamble (P&G) was founded in 1937, by William Proctor and James Gamble in
Cincinnati, Ohio. Beginning with its roots as a soap and candle company, P&G has expanded immensely,
presently being the “world’s largest consumer goods company”, encompassing a plethora of brands in six
industries (or sector business units) being beauty care, baby care, feminine care, fabric care, home care,
personal health care, grooming (Procter & Gamble, 2023a) (Britannica,2023). In fact, P&G’s brands have
become incredibly established in these multiple sectors, from most well-known examples like Gillette,
Ariel, Pampers & Pantene (Procter & Gamble, 2023b). Furthermore, the company operates in over 180
countries globally in Africa & Middle East, the Americas, Asia & Pacific as well as Europe (Procter &
Gamble, 2023e). Of the so-called ‘Sector Business Units’ the most profitable ‘Focus Markets’ account for
80% of sales and 90% of after-tax profit. Within these, transportation, warehousing, logistics and
customer teams are conducted through external representation. The subsequent rest of their global
operations are divided to ‘Enterprise Markets’ that are “separate unit[s] with sales, profit and value
creation responsibility” and are through their growing market nature key in support of the six individual
business units (Procter & Gamble, 2023c).

Earnings Strength

When analyzing some key metrics to understand the company it is possible to observe several
main points that are worth considering if a full understanding of the companies’ operations and its
earnings strengths is expected.
When considering profitability ratios such as net profit margin and gross profit margin it is possible to
observe that P&G has a higher value (18.38%) when compared to the average industry (11.25%). It is
also worth mentioning that the revenue growth remained healthy when compared to other companies in
the industry during economic crisis (Such as COVID-19), further proving how valuable these companies’
products are for the market. Lastly it is possible to observe the dividend policy adopted by the company,
which gives it an extra point when questioning its earning strength as the company has constantly
delivered the promised dividends throughout the years. Having only a 41% of retain ratio it is clear that
the company is trying to back most of its value in the massive portfolio it already possesses, betting on
the importance its products have, as well as the lack of elasticity that these products possess in case of the
market not performing as expected (As many of P&Gs’ products are primary products hard to replace or
outperform in case of a recession).

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 Therefore proving how the company not only remains competitive when compared to its peers in
the market but remains significant in a traditional market as one of its oldest and largest players around
the world. Having a strong earning strength that relays on its relentless capacity of overcoming the most
challenging economical situations while maintaining its healthy ratios as well as its economical policies,
proving worthy of the description “value stock” for its shareholders.

Relative Valuation Summary

When considering PG and creating a relative valuation based on its peer competitors of similar
sizes and maturity stages it is possible to find interesting points to consider. When considering the Debt to
equity ratio it was possible to observe that PG remains the lowest in average (0.84) when compared to
both NESN and ULVR (0.88 and 1.7 respectively) in the past 5 years. Being this ratio a sign of health in
terms of the debt acquire by the company when compared to the equity own by stakeholders. This
specific value is higher when compared to the average in the market (0.71) but considering the maturity
and stage of P&G it is understandable that the company would acquire a slightly higher risk when
compared the risk one would trust in younger-less experienced companies. It is possible to continue this
positive trend with the book value per share as PG possesses a higher BVPS on average (19.07) when
compared to its peers (NESN – 18.97, ULVR – 6.67). Therefore showing that the value of PGs’ specific
stock should be higher than its competitors as it should be representing more value on its books. It is also
possible to see that PG beats the market BVPS by almost double (19.07 PG compared to 9.17 Industry
average). When considering the Cash Flow per share it is possible to see that PG struggles a little as the
value is the highest in the valuation done (6.17 in average) compared to Nestle and Unilever (5.52 and
3.22 respectively). This is a bad sign as it shows that the free cash flows available for the company are
much lower when compared to the value of the shares. This could be relatively attributed to the high
dividends the company pays yearly as it only retains 41% of revenue. Leaving the company with smaller
cashflows to operate with at the end of the year, but still proving to be a value to consider when deciding
on an investment with the company. Lastly, it is possible to observe an extremely healthy Net profit
Margin as the company is more than 4% above the industry average (15.26% PG when compared to
11.25% Industry average), beating all its competitors as well (NESN – 13.940, ULVR – 13.831) and
proving to be extremely valuable when considering how efficiently is the company generating its profits.
While having close margins to its competitors, it is interesting to observe how PG was capable of
surpassing many of its peers and the market in several ratios and aspects, proving valuable according to
the valuation summary and becoming an interesting investment in the long term as it continues to perform

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well when compared to both competitors and the market. (For further information refer to the tab
“Relative Valuation” in the excel document attached).

Peer & Industry Comparative Performance

For closer examination of P&G’s performance in relation to the industry one can consider the
main competitors that they find in the market, being Nestle, Henkel and Unilever. When considering these
competitors and disregarding the specific size of operation of each one of these companies, one can use
ratios (percentage growth of revenue, percentage growth of EBITDA and return on equity) that consider
not only the amount of sales generated but rather the growth and specific performance when generating
these sales. For instance, the percentage growth of revenue calculates the amount by which revenue has
changed in comparison to a previous period of time and therefore allows for analysis of growth in direct
relation to the overall companies performance.

Figure 1: Revenue & Growth Comparison (Pitchbook, 2023c)

When we use this ratio in the market (figure 1) we can observe that P&G’s percentage growth of
revenue at 3.48% is slightly below market average and behind two of their key competitors, of which
Henkel is the only one succeeding the market average (Pitchbook, 2023c). This means that P&G is not
performing as well in terms of growth in comparison to their competitors. However, as they are a very
mature company that has a retention rate of 41%, we can see why the company is not growing as much
as some of the new players (Pitchbook, 2023c). This can also be observed alongside Nestle who are also
below the industry average, and are likewise maturely established, therefore retaining very little of their
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earnings as revenue. However, Henkel, on the other hand is also mature, but has a revenue growth above
industry average and therefore it may be considerable for P&G to look into their strategy for future
growth.
Secondly, a further helpful ratio in determining industry comparative performance is the
percentage growth of EBITDA, which calculates the growth of the company's consolidated earnings
before interest, taxes, depreciation and amortization relative to a previous period of time.

Figure 2: EBITDA % Growth Comparison (Pitchbook, 2023c)

The EBITDA represents the efficiency of the company in using its resources in the short-term. In
application to the market, we can see in figure 2, that P&G’s percentage growth of EBITDA is at 6.11%
above the industry average, with Nestle being the only key competitor that has a higher growth rate in this
ratio (Pitchbook, 2023c). On the other hand, Henkel’s percentage growth of EBITDA is at a negative of -
5.48%, yet still above the industry average, with Unilever’s data being once again unavailable in this
regard (Pitchbook, 2023c). Such a rather low industry average can be deduced to be as a result of a slow
industry recovery from a declined economy due to the recent covid-19 pandemic, leading many
companies to struggle to perform properly in the short-term. Hence these values represent how companies
are able to adapt to these uncertainties, with P&G performing rather well, but can be improved through
proper applications of planned strategy in a slowing economy, which is what gave Nestle a higher ratio in
this specific section (10.16%).

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 Lastly, a final ratio that can be used to determine peer and industry comparative performance is
return on equity. This measures the amount of return on equity for shareholders and therefore effectively
highlights the efficiency of the company in utilizing such investment to generate profit. In application of
this ratio to the current market, P&G’s ROE lies at 33.06%, comparative to a lower ratio for Nestle at
20.10% and a slightly higher percentage for Unilever at 42.89%, with Henkel’s data not being applicable
in this regard, as they solely acquire companies in competition with brands of P&G and others
(Pitchbook, 2023a) (Pitchbook, 2023b) (Pitchbook, 2023c) (Pitchbook, 2023d). While some companies
can have such higher values driven by debt, it can be observed that this does not apply to P&G, proving
that their rather high ROE comes solely from their efficiency of turning shareholders' investments into
profit, despite being not as efficient as Unilever, which could influence attractiveness for further
investors. Nevertheless, it is important to consider Unilever's debt to equity when considering this ratio.
However, it is worth mentioning that P&G’s ROE has been almost steadily increasing since a larger dip
in 2019, comparative to both Unilever and Nestle who’s ROE have fluctuated throughout these years
(Pitchbook, 2023b) (Pitchbook, 2023c) (Pitchbook, 2023d). Hencewise, it can be said that even though
P&G may not have the highest ROE amongst their key competitors, their stable improvement over time
highlights sustainability of their business strategy which can portray valuable trust and security for
potential investors.

Competitive Positioning
With respect to such a large conglomerate like P&G, operating in six key every-day industries,
the competitive landscape is unavoidably extensive. Whilst each individual brand owned by the company
operates within their own competitive positioning, for ease of analysis, P&G’s rivals will be assessed
more broadly alongside three overall companies; Nestle, Unilever and Henkel (Smith, 2023) (Pitchbook,
2023c). As can be seen in figure 3, P&G has the overall second highest total revenue amongst these
competitors, being 18.43b behind the leader; Nestle.

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 Figure 3: Total Revenue Comparisons (Pitchbook, 2023c)

Reasons that constitute this performance include elements like brand portfolio, subsequent market
penetration, as well as innovation and response to market trends. For instance, Nestle leading total
revenue most pertains (amongst other reasons) to their more extensive brand portfolio in comparison to
P&G (as is visually portrayed in figure 4) and therefore is able to generate more total revenue.

Figure 4: Brand Portfolio (Integer Investments, 2017)

Besides this key factor, as supported by ranks of total revenue, it can be argued that P&G has a
significantly dominant competitive positioning. For instance, P&G’s competitive advantage over
Unilever arises most probably out of differing business strategies. Whilst Unilever’s strategy pertains to
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“crafting brands for life” being family-oriented focusing greatly on people and brand loyalty, P&G strives
for innovation as a means of obtaining a competitive advantage (Baker, 2012) (Procter and Gamble,
2023e).. Such strategic measures are especially valuable in light of today’s highly increasing competitive
market trends, in which consumers may on the surface have difficult times distinguishing between
singular brands of each of the companies, and therefore need something ‘exciting’ and ‘new’ to tell them
apart (Macke et al., 2022). For example, in 2021, P&G conducted a consumer electronics show, which
allowed consumers to virtually immerse themselves into the world of the company, not only showing
innovative elements, but also preemptively adhering to currently more prominent trends of AI and VR.
Lastly, whilst both P&G and Unilever have immense market penetrations in multiple sectors, Henkel
(ranked in fourth position) falls significantly behind (Procter and Gamble, 2023e). This is due to their
limiting focus on acquiring companies that mostly operate on chemical developments within the soap,
hair care but predominantly focusing on “adhesives, sealants and functional coatings”, that limits their
ability of market penetration into different industries as well as their subsequent overall market share
(Pitchbook, 2023a) (Henkel, 2023). Hence, it becomes evident that whilst improvements can be made in
terms of brand portfolio P&G’s overall competitive positioning is very robust and shows promising
continuous growth for the future.

Investment Risks
Despite competitive advantages in the industry, it is vital to highlight potential risks of investment
garnered by internal as well as external factors alongside four most significant categories;
political/regulatory, economical, socio-cultural as well as technological, as is highlighted in the
company's Form-10 K. In terms of political as well as regulatory, instances like the war in the Ukraine
that have negatively impacted the company’s growth in both countries, not only in terms of physical
damage of manufacturing facilities but also economic impacts through discontinued investments in
Russia that have further effects on their volatility of foreign exchange (The Procter & Gamble Company,
2022). Furthermore, additional investment risks pertain to impacts on the company due to economic and
financial challenges, like the cost of living crisis seen in the UK, rising inflation rates as part of the
aforementioned war, or overall limited purchasing power of consumers due to the recent pandemic.
Whilst this initially will allow the company to increase prices, as already done, consumers demand of
products will fall inherently leaving the company in disequilibrium both in supply and subsequent
revenue and costs (The Procter & Gamble Company, 2022). Correspondingly, current ever-changing
socio-cultural implications may additionally impact the company’s performance through overall changes
in consumer preferences. Amongst P&G’s SBUs, such threats arise particularly in the beauty care sector,

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which are filled with trends (especially through social media platforms). The 2024 Mintel Consumer
trends of beauty and personal care highlights that consumers are shifting their focus towards more “high
quality” products with particular transparency in terms of ingredients and how they impact both the body
and environment, which through P&G’s extensive brand portfolio is something to be cautious of rather
quickly before consumers possibly shift demands and may lead to further challenges “negative or
inaccurate postings or comments on social media or networking websites about the Company or one of its
brands” that will hence pose further investment risks (Zen et al., 2023) (The Procter & Gamble
Company, 2022). Lastly, subsequent to further consumer trends of AI and VR that the company has
already addressed, possible threats of cybersecurity may find great impacts on infiltration of personal
information and therefore must additionally be considered as an investment risk in this digital age (Zen et
al., 2023) (The Procter & Gamble Company, 2022).

AI Recommendations and Analysis

When asking an AI tool to provide an analysis and decision on whether to buy Procter and
Gamble, the AI tool proved to be incapable of providing a decisive answer due to the lack of access to
real time data as well as for the following reason “Investment decisions should be made based on careful
consideration of various factors, including your financial goals, risk tolerance, investment horizon”. Even
when provided with this information the AI refuses to provide a conclusive answer as it requires the
person asking this question to consult with a professional financial advisor as it is only a “learning tool
incapable of providing financial advising decisions”.

When trying to use this AI tool to perform an analysis, the report reached to the conclusion that the best
decision would be to ask the learning machine to provide us with the steps necessary to fully accomplish
the “factors” mentioned above for a successful investment strategy. To this question the AI was capable
of providing an answer that invited the person who was asking the questions to conduct research and
consider important steps for the full comprehension of the company you are seeking to invest in. These
steps included:

1. Research the Company: Gather information about the company's business model, products or
services, target market, and competitive advantages. Review its financial statements, including
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 the income statement, balance sheet, and cash flow statement, to understand its financial
performance and stability.
2. Assess Financial Performance: Analyze key financial indicators such as revenue growth,
earnings growth, profitability ratios, and cash flow trends to evaluate the company's financial
health and stability.
3. Examine Industry Trends: Understand the dynamics of the industry in which the company
operates. Analyze industry trends, market demand, competitive landscape, and any regulatory
changes that could impact the company's performance.
4. Evaluate Competitive Positioning: Assess the company's competitive positioning relative to its
peers. Consider factors such as market share, product differentiation, pricing strategy, and
barriers to entry within the industry.
5. Review Management Quality: Evaluate the quality and track record of the company's
management team. Assess their strategic vision, execution capabilities, and their ability to
navigate challenges and capitalize on opportunities effectively.
6. Assess Growth Prospects: Analyze the company's growth prospects based on its product
pipeline, expansion plans, and any potential for entering new markets or segments.
7. Consider Valuation Metrics: Evaluate the company's valuation metrics, such as price-to-
earnings ratio (P/E), price-to-book ratio (P/B), and other relevant multiples, to determine whether
the stock is undervalued, overvalued, or trading at a fair value.
8. Understand Risks: Identify and assess any potential risks that could affect the company's
performance, including industry-specific risks, regulatory risks, macroeconomic risks, and
geopolitical risks.
9. Diversification: Ensure that your investment decision aligns with your overall portfolio
diversification strategy, taking into account your risk tolerance and investment objectives.
10. Consult with Professionals: Consider seeking advice from financial advisors or investment
professionals who can provide tailored guidance based on your specific financial situation and
investment goals.
- (ChatGPT, personal communication, February 11, 2023)

When analyzing the steps given by the AI it is possible to observe that the process undertaken is
very similar to the one that could be performed by a professional portfolio manager or financial
analyst. Following steps and researching information that would include the specific risk of a
company (unsystematic risk) as well as the risk carried by the market (systematic risk). The economic

9
 performance of the company, as well as the management body of the company (which could affect
the decision making and therefore the productivity of the company). The AI also recommends
creating relative valuations and comparisons with the industry competitors and even mentions the
need for diversification and the objectives of the investor as these two are correlated.

Proving then, that while not being able to give you a straight answer concerning whether you
should buy or sell a company, it is capable of providing you with important steps needed to follow in
many valuations used nowadays (such as the DCF and FFCF models). It provides logical arguments
on why these steps are important for a full valuation and while not explaining the process, it provides
information on how to perform these steps. Proving to be an interesting tool for people with no
previous knowledge on how to perform a proper analysis and evaluation of a company and which
steps to take to make it as much of an informed decision as possible without the help of a professional
financial analyst (While still mentioning it would be recommended to consult with one). This
recommendation would provide an acceptable result as long as the steps are followed with proper
structures for the valuation of return and risk such as the tools used to generate this report.

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Conclusion

After a thorough analysis, this report concludes that it would be a good idea to acquire stock in
Procter and Gamble as it is undervalued for more than 20 USD per share, providing an interesting
potential in the mid-long term. The company performs well when compared to other competitors in the
market and is capable of continuing to create value, even when considered to be a mature company,
attractive mostly because of its dividends policies. Further analysis would include generating a longer
projection with more accurate assumptions to give a value as accurate as possible. It would also be
interesting to perform a similar analysis on its competitors to understand what other strategies they are
using as well as the sources of value they could bring to the table. Finishing up, it is also concluded that
the use of AI tools could be an interesting but dangerous tool for inexperience analysts as it provides the
steps to follow to create an appropriate analysis but proves vague when guiding the analysts on how to
accurate measure the risk and returns it is recommending to analyze.

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References
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Retrieved October 30, 2023, from https://www.marketingweek.com/unilever-marketing-needs-to-
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Britannica, T. Editors of Encyclopaedia (2023, October 14). Procter & Gamble Company. Encyclopedia
Britannica. https://www.britannica.com/topic/Procter-and-Gamble-Company
Henkel. (2023). Company profile. Retrieved October 30, 2023, from https://www.henkel-
northamerica.com/press/facts-and-figures/company-profile#:~:text=Henkel%20is%20the
%20leading%20solution,percent%20of%20total%20company%20sales.
Integer Investments. (2017, January 31). What’s The Best Consumer Goods Company? Seeking Alpha.
Retrieved October 30, 2023, from https://seekingalpha.com/article/4041263-best-consumer-
goods-company
Macke, D., Crabbe, M. and Moriarty, S. (2022). 2023 Global Consumer Trends. [online] Mintel.
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%20180,in%20small%20but%20meaningful%20ways.
Procter & Gamble. (2023b). Brands. Retrieved October 30, 2023, from https://www.pg.co.uk/brands/
Procter & Gamble. (2023c). Corporate structure. Retrieved October 30, 2023, from
https://www.pg.co.uk/structure-and-governance/corporate-structure/
Procter & Gamble. (2023d). Innovation. Procter & Gamble. Retrieved October 30, 2023, from
https://www.pg.co.uk/innovation/
Procter & Gamble. (2023e). P&G world locations. Retrieved October 30, 2023, from
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gambles-pg-main-competitors.asp

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The Procter & Gamble Company. (2022). Form 10-K. In United States Securities and Exchange
Comission.Retrieved October 30, 2023, from
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