Goldman Sachs Blasts Procter & Gamble Stock as Too "Rich" to Own

Donald Trump's inauguration as president later this month could mean good news for a lot of stocks -- just not for Procter & Gamble (NYSE: PG).

This, in a nutshell, is what Goldman Sachs had to say about Procter & Gamble stock this morning, downgrading the stock from neutral to sell, and cutting its price target by $9 -- or 10% -- from $86 to just $77. At today's share price of $84 and change, Goldman is therefore predicting that Procter & Gamble will give back most of last year's 11% gains over the course of 2017.

Here are three more things you need to know.

Goldman Sachs sees a long aisle ahead of Procter & Gamble, and no future for the stock. Image source: Getty Images.

1. "arelative laggard"

As explained in a write-up on this morning, Goldman Sachs believes that Procter & Gamble stock is essentially a victim of its own success: "Given PG's size, we view needle-moving M&A as unlikely." Neither will the company benefit greatly from corporate tax cuts or new, beneficial rates on repatriation of foreign-earned income -- because P&G has a "relatively small international cash balance."

But here's the most important reason Goldman thinks that Procter & Gamble stock will underperform this year, and calls it "a relative laggard": The stock simply costs too much. "In a still relatively rich sector," says Goldman, "PG stands out with its absolute P/E still near a decade high of 21.6x." This P/E ratio values Procter & Gamble roughly 10% higher than its competitors, while the stock's "EV/EBITDA multiple" of 15.4 sits 16% above "the 13.3x peer average."

2. But not the only laggard

Goldman Sachs' condemnation of Procter & Gamble stock this morning was harsh -- but it wasn't the only stock the analyst called out for costing too much. Also marked downwith a red pen was Coca-Cola (NYSE: KO), which Goldman assigned a sell rating (and a $39 price target).

Coke, says Goldman, faces significant headwinds from trying to sell dollar-denominated soda internationally, to a world that values the dollar too highly -- making Coke products even more expensive. The analyst warns that this will result in "sub-par" sales growth in 2017, and cause investors to value Coke's earnings at a lower price multiple -- perhaps 19 times earnings, rather than 20.

The result, says Goldman, will be a $39 stock price at the end of this year, which implies a smaller-than-Procter potential loss of 6% on Coca-Cola stock -- but still a loss.

3. Something better

So if not Procter & Gamble or Coke, what consumer goods stock does Goldman think you should buy this year? Believe it or not, Philip Morris International (NYSE: PM).

While Goldman Sachs is no longer enthusiastic enough to keep Philip Morris stock on its conviction list, and in fact cut the stock from that list this morning, Goldman still rates Philip Morris International a buy. According to the analyst, 2017 could be the year that iQOS "Marlboro HeatSticks" will break out internationally, contributing perhaps 2.8% to Philip Morris' total sales.

Goldman believes that Philip Morris stock, currently priced just over $91 a share, will hit $102 this year, resulting in a 12% profit -- 16.5% after including dividends.

Final thing: Valuing the options

Is Goldman Sachs right in preferring Philip Morris stock over Procter & Gamble and Coca-Cola?

Valued on trailing earnings(and forward earnings as well, for that matter), Philip Morris is clearly the cheapest of the three stocks. Its 22 P/E ratio is 9% cheaper than Procter & Gamble's 24 P/E, and 13% cheaper than Coke at 25.3. Additionally, analysts estimate that Philip Morris will grow earnings nearly as fast as Procter & Gamble over the next five years -- 7.8% versus 8% -- and several times faster than Coke's projected 1.8% long-term growth rate. Additionally, Philip Morris' 4.5% dividend yield is higher than what Coke (3.4%) and Procter & Gamble (3.2%) pay.

Personally, I still don't think Philip Morris' total expected return (growth rate, plus dividend yield) of 12.3% justifies the 22 P/E ratio. But Goldman Sachs does have at least one point right: Relative to Procter & Gamble and Coca-Cola stock, Philip Morris is the cheapest stock of the three. If investing in big, international blue chips is your thing, it's probably the best option available right now.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 359 out of more than 75,000 rated members.The Motley Fool recommends Coca-Cola. The Motley Fool has a disclosure policy.