Procter & Gamble (PG – free Value Line report on Procter & Gamble) has a Timeliness Rank of 4, suggesting that this high-quality stock will underperform the broader market over the next six to 12 months. Value Line’s proprietary Timeliness Rank can be found in the Ranks box at the top left of each Value Line report. Normally, investors should avoid stocks that receive Ranks of 4 or 5 and, instead, stick to stocks ranked 3 or better in this regard.
This logic works for investors focused on growth, but value investors can often find investments of interest in lower ranked stocks. Procter & Gamble could be just such an opportunity. For starters, as Value Line analyst Erik Antonson points out in the first sentence of the Analyst Commentary, “Procter & Gamble is having a rough go of it.”
The reasons stem largely from input cost inflation—in other words, it is costing the company more to create the products it sells. This is fine if a company can increase prices, but difficult to deal with if the company can’t. Clearly, the recession and the subsequent weak recovery is a difficult environment in which to raise prices. Management has initiated price hikes, but the real benefit isn’t likely to be seen until fiscal 2013 (P&G’s fiscal year ends in June).
So, right now, things don’t look so good for this global branded consumer packaged good giant. (Note that over 60% of fiscal 2011 sales come from foreign markets—a statistic shown in the Business Description section of the page). However, it is important to look beyond the near-term picture in this situation. In fact, 2013, which is when Antonson expects things to start looking better, is still too “near term” for a company like Procter & Gamble.
Stepping back from performance, the company earns Value Line’s Highest rank (1) for Safety (found in the Ranks box). The Safety rank is computed by averaging two other proprietary indexes, the Price Stability Index and the Financial Strength rating. Both of these measures are found at the bottom right of a Value Line report in the Ratings box. Safety ranks range from 1 (Highest) to 5 (Lowest), the same scale as the Timeliness rank. The Ratings box, meanwhile, shows a Financial Strength rating of A++ and a Price Stability score of 100—each of which is the highest scores we accord.
So, clearly, Procter & Gamble is a financially solid company with a stable share price. Adding more statistics, the shares have a beta of 0.60, well below the market (the market’s beta is assumed to be 1.00). Thus, for a 1% move in the broader market, Procter & Gamble shares will move just 0.6%—either up or down. Every stock’s beta is provided in the Ranks box.
Two other statistics included in the Ratings box are Price Growth Persistence and Earnings Predictability. Both of these ratings range from 100 (Highest) to 5 (Lowest). Price Growth Persistence is a measure of the historic tendency of a stock to show persistent price growth compared to the average stock. Note that this isn’t a measure of the size of the change, as it only tracks the regularity with which a stock’s price has gone up. Earnings Predictability is a measure of the reliability of an earnings forecast. Predictability is based upon the stability of year-to-year comparisons, with recent years being weighted more heavily than earlier ones.
Procter & Gamble scores well on Earnings Predictability, but not as well on Price Growth Persistence. Some of the weakness in its Price Growth Persistence score stems from the stock price decline during the recession followed by the resumption of its historically slow and steady price gains—but starting from a slightly lower level than the shares had attained before the recession. So, one bad number shouldn’t count this financially strong industry giant out.
After examining all of the above, it is clear that P&G investors shouldn’t expect dynamic outperformance over the next six to 12 months. However, such near-term outperformance has rarely been a hallmark of these shares—slow and steady is a more appropriate expectation. So is there reason to consider this stock looking out over a longer time period. The answer is a resounding yes, for more conservative investors.
Antonson’s three- to five-year earnings projections, shown to the far right in the Statistical Array, call for earnings to advance to the $6.05 range from fiscal 2011’s $3.93. This translates to a 10% annualized growth rate (this figure can be found in the Annual Rates box). Taking those numbers and translating that into share prices creates a lower range of $90 and a high range of $110, compares to the recent price of $67.21. The projected price range can be seen visually on the Graph via the dotted lines to the far right and in number form in the Projections box.
Also in the Projections box is the percentage gain that the high and low prices would translate into, 35% and 65%, respectively, in this case, and the annualized total return they suggest. Note that annualized total return takes into account the historically high 3.1% dividend yield (found in the Top Label that runs across the top of each Value Line report). The projected annualized total return for Procter & Gamble shares is between 11% and 16%—a solid return from a company like P&G.
So, while Procter & Gamble has hit a “rough” patch and its shares aren’t expected to be top performers over the next six to 12 months, conservative investors with longer-time horizons might want to look past the subpar Timeliness rank and consider this safe and steady performer for the long haul.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.