In a previous article, I laid out the bear case against Procter & Gamble (NYSE: PG). Today, let's take a look at some ways the consumer-goods titan's stock could trend higher in the coming years.
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Over the last five fiscal years, P&G has slashed its costs by more than $10 billion. Now, the company has set its sights on generating an additional $10 billion in cost savings over the next half-decade.
During this time, Procter & Gamble has shed more than 100 brands to better focus on the 65 with the best sales and earnings growth prospects. In addition, P&G has redesigned completely its manufacturing and supply-chain systems, simplified its organizational structure, and instituted a more focused advertising campaign for its best brands.
These cost cuts have helped P&G's "core" -- a non-GAAP measure that adjusts for restructuring and other non-recurring charges -- gross and operating margins improve by several percentage points since fiscal 2013. In turn, P&G has delivered significant increases in earnings per share, even as its sales growth has remained tepid.
If P&G can meet -- or even better, exceed -- its current $10 billion cost-savings goal, the consumer-goods giant's margins should continue to trend higher. And as Procter & Gamble's profits rise, so, too, should its stock price.
Accelerating organic sales growth
Still, if Procter & Gamble is to deliver sustainable long-term earnings growth, it will need to also grow its revenue. That's been a difficult challenge for P&G for much of the last several years, as it's struggled with market-share losses across many of its product lines.
Yet fiscal 2017 offered investors some hope in this regard, with organic sales rising 2% year over year. That represented a 1 percentage point improvement over 2016. Management expects this trend to continue, with organic sales growth accelerating to as high as 3% in fiscal 2018.
If Procter & Gamble can stem its market-share losses and consistently grow its organic sales in the coming years, its earnings growth could exceed investors' expectations. That, in turn, would likely help to drive its share price higher.
Activist investor Trian Fund Management is attempting to gain a seat on P&G's board of directors. Led by billionaire Nelson Peltz, Trian has a long track record of successful investments in consumer-goods companies.
Trian has been clear that it's neither seeking to replace CEO David Taylor or any existing directors nor pushing for a break-up of the company. The fund says it's "simply asking shareholders to vote to add Nelson to the board where his sole focus will be to improve long-term performance, prioritizing market share, profitable growth and stronger shareholder returns."
Procter & Gamble has responded by saying that "Trian continues to offer no new, actionable ideas to drive additional value for P&G shareholders." Rather, the company argues that Trian and Nelson Peltz "have repeatedly encouraged P&G to continue the execution of the current strategy and plan that P&G already has in place -- direct affirmation of the fact that our plan is working."
How this proxy fight plays out remains to be seen. If Peltz is successful in gaining a board seat, investors may be willing to pay a higher price for P&G's shares if they believe Peltz's presence will help to improve the company's operational performance. And with Trian holding a $3.5 billion stake in Procter & Gamble, the activist fund is sure to maintain pressure on P&G's management team to deliver on its growth targets.
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