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Showing No LUV for Procter & Gamble
Posted by: Dr. Paul Price (IP Logged)
Date: April 25, 2013 02:07PM
Consumer goods giant Procter & Gamble (PG) got no respect in Wednesday’s trading. The shares dropped $4.82 (5.88%) just one day after hitting a new all-time high of $82.54.
First quarter earnings were a bit light. Management guided down to $4.00, a nickel shy of most analyst projections. Still, a 1.25% dip in estimates can’t explain a one-day almost 6% sell-off. How could PG get blasted so badly as the owner of all the iconic household brands shown below?
The answer is pretty simple if you know your stock market history and pay attention to valuation. Yesterday’s new pinnacle took PG to 20.4x projected fiscal year 2013 earnings (fiscal year ends June 30). It also brought the dividend, recently raised to 60 cents quarterly, down to a 2.91% current yield. While that level of income seems good in a ZIRP world it is well below PG’s own average annual dividend yield of 3.13% from the years 2010 to 2012.
That 20.4 P/E was higher than PG’s pre-crash 2008 level. Over the past seven years it was only exceeded once — by the late 2007 peak of 23.2x. Both the 2007 and 2008 overvaluations were fleeting affairs. This almost $85 billion sales company is no longer a high-growth vehicle. EPS contracted slightly in both fiscal year 2009 and 2010.
The five-year CAGR has been only 6.5%. That is hardly enough to justify an extravagant multiple. PG’s average annual P/E since 2007 has been 17.5 times, mainly supported by investors' flight to safety and the relatively generous cash payout.
Research firm Morningstar assumed a more normalized 17.3x P/E in calculating their fair value figure of $70. They correctly carried just a two-star (out of five) sell rating before the stock regressed.
What did PG look like at the three best buying opportunities of the past six years? The generational low set in early 2009 allowed purchase at just 12.1 times earnings with a 3.65% yield. It seems unlikely we’ll see another chance at a level like that anytime soon.
The 2011 low came at 14.7x trailing earnings along with a 3.63% dividend. Last summer’s bottom, in a ZIRP supported world, was at 15.4x actual EPS supplemented with a 3.80% payout. Against that backdrop the recent peak looks even pricier.
Those who bought this week’s enthusiasm may suffer the same fate as momentum chasers from 2007 and pre-crash 2008. It took four to five years to see any price appreciation if you entered the PG trade at too dear a valuation.
Risk down to $70 to $72 is very real. Upside appears slim. Avoid new commitments. For current holders it is not too late to lock in gains. Why continue holding a stock that is likely to provide sub-par returns?
Disclosure: No position
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