PG Analyst Report

8/10/2019 PG Analyst Report

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Comment

Please see analyst certification and other important disclosures starting on page 10.

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Equity ResearchNorth America

Analysis of Sales/Earnings August 02, 2004William Pecoriello+1 (1)914 225 [email protected]

Javier Escalante+1 (1)212 761 [email protected]

Strong 2Q; Right Moves Ensure A Solid 05 Outlook

STOCK RATING EQUAL-WEIGHTPrice (July 30, 2004) $52.15Price Target $55

52-Week Range $56.08-43.26Stock ratings are relative to the analysts industry (orindustry teams) coverage universe.

GICS SECTOR CONSUMER STAPLESUS Strategist Weight 12.4%S&P 500 Weight 10.9% WHATS CHANGED

2005 EPS estimate $2.55 to $2.58 2006 EPS estimate $2.80 to 2.85

PG beat our 2Q estimate by $0.01 and consensus by $0.022Q EPS of $0.50 was high quality driven by profits upsides across all divisions. Softer

op profit growth in Fabric & Home (4% vs. corporate average of +14%) reflectsP&Gs portfolio strategy, in our view. Organic sales of +8% was 100 basis pointsahead of mid-quarter guidance, which suggests that PG left F04 in a strong note.

P&G continues making the right portfolio movesP&Gs F05 earnings seem to build on a more balanced top-line and margin math, asexpected. P&Gs reallocation of resources away from tissue through price increasesand the reinvestment of this upside into Wella is the right move. This investment inWella adds growth to P&Gs portfolio and likely extracts more value in the long-term.

We are raising 05 EPS to $2.58 or +11%-12% growthOur 05 EPS excludes the impact of $0.02 gain from divesting Sunny D in F1Q05.This revision accounts for greater comfort on: 1) the realization of price increases inUS tissue, 2) P&Gs flexibility to cover charges related to Wellas integration whileinvesting in its top-line, 3) the continuation of P&Gs emerging market momentum.

PG screens fair value after earnings changingWe are leaving our secular EPS growth unchanged at 10%, as 8% organic sales growthin F4Q04 implies a 3 yr. run-rate of 4-5%, which is consistent with LT targets. Weestimate fair value at $53 today and leave our year-end PT at $55.

Industry View: In-LineWe find the HPC group fairly valued under a battery of valuation methodologies.

FY ending Jun 30: 2003 2004 2005e 2006e

Modelware EPS ($) 2.04 2.33 2.58 2.85Prior EPS Ests. ($) First Call Consensus ($) 2.04 2.31 2.56 2.82Revenue ($ m) 43,373 51,318 54,211 56,919P/E 21.9 22.5 20.5 18.6P/E Rel. to (local index) (%) Price/Book 7.7 8.3 7.6 7.0EV/EBITDA 13.0 13.8 12.9 12.0Dividend Yield (%) 1.7 1.6 1.7 1.7

Market Cap ($ m) 144,803 Q'trly 2004e 2005e 2006eEnterprise Value ($ m) EPS estmate curr prior curr prior

Debt/Cap (06/03)(%) 35.8 Q1 0.63 Return on Equity (06/03)(%) 41.1 Q2 0.65 Shares Outstanding (m) 2,776.7 Q3 0.55 Q4 0.50 e = Morgan Stanley Research estimates; Please see explanation of Morgan Stanley ModelWareinitiative later in this report

Morgan Stanley does and seeks to do businesswith companies covered in its research reports.As a result, investors should be aware that thefirm may have a conflict of interest that couldaffect the objectivity of this report. Investors

should consider this report as only a singlefactor in making their investment decision.Customers of Morgan Stanley in the UnitedStates can receive independent, third-partyresearch on the company or companies coveredin this report, at no cost to them, where suchresearch is available. Customers can access thisindependent research atwww.morganstanley.com/equityresearch or cancall 800-624-2063 to request a copy of thisresearch.

United States of America Procter & GambleReuters: PG.N Bloomberg: PG NYSE: PGHousehold & Personal Care


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Procter & Gamble August 02, 2004


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Strong 2Q; Right Moves Ensure A Solid 05 OutlookCompany Description

Procter & Gamble (P&G) is a global consumer products company, withleading worldwide market shares in the laundry detergent, hair care,disposable diaper, and feminine protection segments

Summary and Investment ConclusionP&G posted another strong, top-line driven quarterwith earnings growth of 16%, exceeding our estimate by$0.01. 2Q EPS of $0.50 was high quality driven by profitsupsides across all divisions. Softer op profit growth inFabric & Home (4% vs. corporate average of +14%) reflectsP&Gs portfolio strategy, in our view. Organic sales of+8% was 100 basis points ahead of mid-quarter guidance,which suggests that PG left F04 in a strong note. We alsonote that P&G did not see the deceleration other CPGcompanies and a few retailers experienced in July, whichimplies that P&G still is ahead of the pack.

We believe that P&G continues making the rightstrategic moves, as it is deepening its portfolio strategyto extend this remarkable top-line momentum . Asexpected, P&Gs F05 earnings growth builds on balancingmore the companys top-line with margin expansion,reflecting both strategic moves and reporting mechanics(e.g., the consolidation of Wella anniversaries in F1Q05).

P&Gs reallocation of resources away from slow-growth,low-return businesses such as paper through price increasesand the reinvestment of that upside into Wella is the rightstrategic move in two ways, in our view. First, Wella addsgrowth to P&Gs portfolio. Second, by balancingreinvestment and savings P&G will likely extract the mostlong-term value out of this acquisition.

We are raising our F05 projection to $2.58 from $2.56 or+11.6% growth, as we exclude the $0.02 gain fromSunny D. This revision increases our 05 earnings growthforecast from +10% to +11-12% beyond the reflection of

the slightly greater 04 base and accounts for our greatercomfort on: 1) the realization of the price increases in paperand pet food to recover commodity inflation; 2) P&Gsflexibility to cover charges related to Wellas integrationwhile investing in preserving its top-line, 3) thecontinuation of the emerging market momentum well intoF05.

According to our estimates, the market has been

disciplined when valuing PG shares. Based on 10-yearDCF/ EVA models, we estimate the fair value PG shares at$53 today, which continues to point at a year-end pricetarget of $55. This valuation reflects our new 05 earningsgrowth outlook of 11-12% while maintaining a long-termgrowth rate of +10%. We estimate that F4Q04 organicsales of +8% implies a 3-year run-rate of +4.3%, which isconsistent with P&Gs long-term growth targets. We

believe that PG is a core holding for investors seekingexposure to consumer staples. We reiterate our Equal-weight rating on the stock.

How does F4Q 04 change our view?We leave F04 with increased comfort about P&Gsportfolio strategy, as management is

Investing to preserve Wellas momentum and retaininga larger portion of its go-to-market capability. Thesemoves seek to extract the most long-term value out ofthis acquisition.

ModelWare is a proprietary framework for financialanalysis created by Morgan Stanley Research. This newframework rests on the principles of comparability,transparency and fl exi bili ty , and aims to provideinvestors with better tools to assess the anticipated

performance of an enterprise.

Specifically, ModelWare will provide the investor with: a broad set of consistently defined forecast measures an extensive taxonomy of more than 3500 unique

metrics for comparison the flexibility to combine data elements and

create user-defined metrics for customized analytics the transparency to see components of every

calculation the ability to make rapid, meaningful comparisons

across companies, industries or geographiesFor more information on ModelWare, please see"Introducing ModelWare: A Road Map for Investors," byTrevor Harris and team, August 2, 2004.


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Taking commodity-related price increases in US tissue, pet food and coffee . More encouraging, price increasesare gaining traction in tissue, the most promotional

category within staples. Increasing exposure to emerging markets and boost the

underlying growth of its portfolio.

In addition to reflect a 04 earnings base that is $0.01higher, we are increasing our F05 EPS estimate to $2.58from $2.56 to account for

At least partial realization of price increases in UStissue during the 2nd half of 2004, given the likelyadherence by competitors and acceptance by retailerssuch as Wal-Mart.

Restructuring charges related to Wella seem easilycovered within P&Gs budget for on-goingrestructuring.

Our F05 EPS estimate excludes the $0.02 gain from theSunny D divestiture and therefore we are raising 05earning growth rate from 10% to 11.6% to account for theabove and favorable macros in emerging markets.

What happened?4Q EPS of $0.50 or +16% growth exceeded our forecast

by $0.01 and beat consensus by $0.02. Earnings qualitywas very good, as operating profit of +14% was 6 pointsahead of forecasted +8-9%.

4Q organic sales of +8% implies a 3-year run-rate of+4.3%, which is consistent with P&Gs long-termgrowth targets. Reported sales of +19% included 3 pointsof FX and 8 points from acquisitions, both roughly in-linewith forecast. Unit volume growth of +10% matched ourforecast, pricing of (1)% was also in-line, while thecompany had a bit of better mix of (1)% vs. our forecast of(2)%. The most salient difference to our forecast was the

performance of Baby and Family Care, as P&G didsignificantly better (+8% vs. our +6%) owing to strongtrends in diapers and paper towels. Please refer to Exhibit 1for an analysis of 4Q results.

05 guidance of $2.58 confirms consensus earningsgrowth rate of +10.5-11.0%. New guidance simplyadjusts for $0.02 upside in 4Q and new 04 earnings base of$2.33.

EPS of $2.58 includes a $0.02 gain related to thedivestiture of Sunny Delight. P&G will book this gain in1Q 05 and expects the subsequent dilution to offset fully the

gain.

What we liked?Procters top-line momentum is solid across developingand mature markets, which bodes well for F05 . Weestimate that P&G is growing in mature markets (W Europe,

North America and Japan) at +7%-8% despite a tough retailenvironment and the maturity of P&Gs householdcategories still half of the portfolio. This strong growthsuggests significant share gains across most categories.Volume growth of +20% in developing markets reflects

both strong market and P&Gs exposure to the rightmarkets, such as China and Russia, and faster growth of

personal care categories with the improved macros, we believe.

Price increases to recover commodity inflation appear tobe gaining traction. Starting in F1Q05, P&G applied priceincreases in US tissue, Iams pet food and is seeking pricerealization in coffee. These increases, if well accepted byconsumers and retailers and at least partly followed bycompetitors, should free resources up to drive growth inhigher return categories such as beauty and health care.

Reinvestment to support Wellas top-line as P&G

integrates these operations. P&G opted to retain more ofWellas go-to-market capability and invest behind Wellastop-line. We view this move as a net strategic positive andconsistent with the acquisition rationale of this business.This move seeks to balance the realization of savings andtop-line synergies from Wella, given the growth issues P&Gencountered with Clairols hair color business whoseintegration focused first on savings and less on the top-line.In early F1Q 05, P&G announced the layoff of 1,500employees, 80% of which are Wellas and the balance fromP&Gs. The way we understand the mechanics of reporting,P&G will be matching the charges on the Wella portion

against a balance sheet reserve, effectively neutralizing itsP&L impact. P&G will be incurring in charges related tothe PG side (the other 20% being laid off) which seemseasily covered by P&Gs budget for on-going restructuringof $150-200M.

Gains from the rollout of Herbal Essences in Europeand Japan balance the weakness of Clairols colorportfolio in the US. P&G acquired Clairol because of thehair color and not the shampoo business but the fact that


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Herbal Essences has generated good traction in Europe andJapan offsets some of the growth issues Clairols hair colorstill has domestically, and therefore is a positive.

What concerns usTop-line comps get tougher in the 2H 05. If growthcomps are considered, P&G guidance embeds accelerationof sales growth relative to F1Q 05 guidance: 1Q organicsales growth of +4-6% on top of 7% year ago and F05organic sales of +5-6% lapping a full year comp of +8%.This is a combination of conservatism (mainly theacceptance of the price increases on paper, pet food andcoffee) and the timing of the 05 new product pipeline, we

believe.

The efficiency of the ad spending to support Wellas top-line might come down a bit during the integration . Thefact that P&G is backing Wella with higher reinvestment iswithout a doubt a strategic positive, as it ensures thatWellas top-line does not weaken at a time that LOreal isaggressively investing. It is possible however that thisspending might not have the bang it would, given theexecution difficulties the integration would conceivablygenerate.

We are factoring the success of price increases in UStissue, pet food and coffee but only partial increases arepossible . P&G is passing through higher commodity prices

in tissue and pet food, while it is seeking better pricerealization in coffee as well. We are now including for thefirst time in our forecast the successful increase in US tissue,as up to now we have remained skeptical given Wal-Martsagenda with White Cloud and Georgia-Pacifics withBrawny. We expect the competitive dynamics in US paperto remain fluid, as the promotional environment isimproving in tissue but appears to be worsening in diapers.In pet food, Nestle is restaging Purina and P&G might need

to reinvest a significant portion of its increases on Iams tocounter Nestles higher ad spending and promotions.

Share-driven growth might ultimately triggercompetitive responses . P&G continues managing is

portfolio, as suggested by the aggressive pricing indetergents. In this BU, P&G profits growth decelerated toonly +4% despite 9% volume growth. Since we do not

believe the macros in emerging markets could have liftedthe underlying growth of a mature category such asdetergents to 9%, P&G share gains are likely accelerating.Changes in competitors strategies can make the goingtougher from here.

Risks to our Procter & Gamble outlook1) Wella integration risk and fixing Clairol business are keychallenges; 2) Over exposure to mature markets like the USand Western Europe in mature categories such as paper anddetergents could slow growth below projected 4.5%; 3)Procters mid-tier pricing strategy could slow profit growth

below forecasted +7%; 4) The risk of new acquisitions andProcters growth strategy in paper can further dilute itsROIC; 5) Channel migration could reduce economic returnsin the longer run; 6) sustained global economic weaknesscould hinder Procters growth.

Valuation of Procter & Gamble ($53) sharesBased on our estimates, we believe that PG largely reflects

the current risk-reward tradeoff and rate the shares Equal-Weight. We estimate a current fair value of $50 through 10year discounted cash flow and EVA models using a WACCof 9.1% and a terminal growth of 3.0%, which implies a $5512 month target price. We also triangulate PG valuationagainst relative and ROIC spread valuations vs. staples andHPC sectors.


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Exhibit 1

PG Earnings Analysis

PROCTER & GAMBLE$ millions except per share Quarter ending 6/30 B/(W)Income Statement (FY ending June) YAGO FCST ACTUAL YAGO FCST

Revenue, by segment:Fabric + Home Care $3,265 $3,507 $3,487 $222 ($20)Baby + Family Care 2,508 2,618 2,731 223 113Beauty- Proforma 3,075 4,471 4,412 1,337 (59)Health Care 1,391 1,577 1,636 245 59Snacks + Beverages 779 860 855 76 (5)Corporate (98) (160) (159) (61) 1

Total Revenue $10,920 $12,873 $12,962 $2,042 $89% change vs. prior 7.6% 17.9% 18.7% 11.1% 0.8%

COGS 5,600 6,542 6,479 (879) 63Gross Profit 5,320 6,332 6,483 1,163 151

Marketing, R&D, Admin + Other 3,470 4,342 4,344 (874) (2) EBIT 1,850.0 1,990 2,139 289 149

Operating margin 16.9% 15.5% 16.5%Change vs. prior (148) bps (44) bps

Interest Expense (136) (166) (175.0) (39) (9) Interest & other income, net 24 56 16.0 (8) (40) Pre-tax Income by segment:

Fabric + Home Care $751 $821 $782 $31 ($39)Baby + Family Care 271 284 350 79 66Beauty- Proforma 679 779 792 113 13Health Care 158 186 222 64 36Snacks + Beverages 83 95 115 32 20Corporate (204) (285) (281) (77) 4

Pre-Tax Income $1,738 $1,880 $1,980 $242 $100% change vs. prior 11.3% 8.2% 13.9% 2.7% 5.8%

Tax 522 577 606 (84) (29)Tax Rate 30.0% 30.7% 30.6% (57) bps 9 bps

Net Income Available to Common, by segment:Fabric + Home Care 499.0 534.2 523.0 24.0 (11.2) Baby + Family Care 165.0 192.8 201.0 36.0 8.2 Beauty Care 466.0 501.6 532.0 66.0 30.4 Health Care 110.0 130.3 138.0 28.0 7.7 Snacks + Beverages 55.0 41.7 77.0 22.0 35.3 Corporate (79.0) (97.7) (97.0) (18.0) 0.7

Core Net Income $1,216 $1,303 1,374.0 $158 $71Preferred Dividends 31 31 33 (2) (2)Core Net Income to Common (Basic) $1,185 $1,272 $1,341 $156 $69

% change vs. prior 12.3% 7.3% 13.2% 0.8% 5.8%Preferred Dividend Impact on ESOP 2 2 0 2 2

Core Net Income to Common (Diluted) $1,214 $1,301 $1,374 $160 $73% change vs. prior 12.3% 7.2% 13.2% 0.9% 6.0%

Core Earnings Per ShareBasic $0.46 $0.50 $0.52 $0.06 $0.02Diluted $0.43 $0.49 $0.50 $0.07 $0.01% change vs. prior 13.2% 14.0% 15.2% 2.1% 1.3%

Avg. Shares - Basic 2,589 2,540 2,556 (33) 16 Avg. Shares - Diluted 2,799 2,645 2,773 (26) 128

Source: Company accounts, Morgan Stanley Research


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Exhibit 3

Procter & Gamble Cash Flow Statement

PROCTER & GAMBLE$ millions except per share 2004 2005E 2006E 2007E 2008E 2009ECash Flow Statement

Net Income from Continuing Operations $6,481 $7,007 $7,581 $8,132 $8,673 $9,296 Adjustments:Provision for RestructuringDepreciation & Amortization 1,733 1,803 1,885 1,990 2,116 2,261Other Non-cash ItemsChanges in Working Capital 434 296 132 186 59 119Other Non-current Assets & Liabilities 714 (637) 216 208 206 197Net Cash from Operating Activities $9,362 $8,470 $9,814 $10,515 $11,054 $11,873

Capital Expenditures (2,024) (2,173) (2,289) (2,398) (2,507) (2,612) Asset sales or retirements (PP&E) 230Sale/(Acquisition) of Businesses (7,476)Change in Marketable securities (121) 0 0 0 0 0Net Cash from Investing Activities (9,391) (2,173) (2,289) (2,398) (2,507) (2,612)

Purchase of Treasury Stock (4,070) (4,000) (4,400) (5,500) (6,875) (8,250)Proceeds from Stock Options 555 0 0 0 0 0

Additions to Long-term Debt 1,963 0 0 0 0 0Repayment of Long-Term Debt (1,188) 1,569 (5) 576 1,606 2,331Increase (Decrease) in ST Debt 4,911Dividends Paid to Shareholders (2,539) (2,816) (2,929) (3,038) (3,138) (3,227)Net Cash from Financing Activities ($368) ($5,247) ($7,333) ($7,962) ($8,407) ($9,145)

Exchange Rate Effect (46) 0 0 0 0 0Increase (Decrease) in Cash + Equivalents (443) 1,049 192 156 140 116Cash + Equivalents at Beginning of Period 5,912 5,469 6,518 6,710 6,866 7,006Cash + Equivalents at End of Period 5,469 6,518 6,710 6,866 7,006 7,122



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Exhibit 4

Procter & Gamble Balance Sheet

PROCTER & GAMBLE$ millions except per share 2004 2005E 2006E 2007E 2008E 2009E

Balance Sheet

Assets:Total Cash + Equivalents $5,892 $6,941 $7,133 $7,289 $7,429 $7,545Net Accounts Receivable 4,062 3,358 3,459 3,542 3,617 3,680Inventories 4,400 4,715 4,741 4,887 5,026 5,097Other Current Assets, incl. Def. Taxes 2,761 2,118 2,226 2,182 2,281 2,377Total Current Assets 17,115 17,133 17,560 17,900 18,353 18,699Property, Plant + Equipment 14,108 14,665 15,257 15,853 16,433 16,972Net Goodwill and Intangibles 23,900 23,712 23,524 23,336 23,148 22,960Other Assets 1,925 1,925 1,925 1,925 1,925 1,925Total Assets $57,048 $57,435 $58,266 $59,015 $59,859 $60,556

Liabilities + Shareholders' Equity: Accounts Payable and Accrued Liabilities $11,306 $11,126 $11,313 $11,525 $11,742 $11,912Income Taxes 2,554 1,999 2,179 2,337 2,493 2,672Total Current Liabilities 13,860 13,125 13,492 13,863 14,235 14,584Old Total Debt 20,841 20,841 22,410 22,405 22,982 24,587New Debt/(Debt Paydown) 1,569 (5) 576 1,606 2,331Deferred Income Taxes 1,562 1,625 1,689 1,751 1,808Other Long-Term Liabilities 5,069 2,869 3,023 3,167 3,311 3,450Total Liabilities $39,770 $39,966 $40,545 $41,700 $43,883 $46,761

Shareholders' Equity:Total Shareholders' Equity 17,278 17,469 17,721 17,315 15,976 13,795Total Liabilities + Shareholders' Equity $57,048 $57,435 $58,266 $59,015 $59,859 $60,556



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Modelware is a proprietary framework for financial analysis created by Morgan Stanley Research. This new framework rests

on the principles of comparability, transparency, and flexibility, and aims to provide investors with better tools to view theanticipated performance of an enterprise. The result of an 18-month global effort, Modelware harmonizes the underlying dataand calculations in Morgan Stanley models with a broad set of consistently defined financial metrics. Our analysts have

populated the database with over 2.5 million data points, based on an extensive taxonomy of more than 3,500 unique metricsand more than 400 Morgan Stanley calculations. The Modelware framework will also have the flexibility to allow analysts andinvestors to add or change data elements, even quickly customize their own analytical approach.

What makes the Modelware architecture distinctive lies in the separation of data from calculations. Its transparency will permitusers to see every component of every calculation, to choose elements or recombine them as they wish without laboriousadjustments or recalculations. When choices must be made in defining standard or industry-specific measures, Modelwaredefaults to economic logic, rather than favoring one accounting rule over another. This discipline facilitates comparabilityacross sectors and regions. Underlying the Modelware data is a new set of systems that check the internal consistency of

forecast data in each of our analysts models.

Modelware EPS illustrates the approach taken. It represents Modelware net income divided by average fully diluted sharesoutstanding. Modelware net income sums net operating profit after tax (NOPAT), net financial income or expense (NFE), andother income or expense. Modelware adjusts reported net income to improve comparability across companies, sectors, andregions. These adjustments include the following: We exclude goodwill amortization and items deemed by analysts to beone-time events; we capitalize operating leases where their use is significant (e.g., in transportation and retail); we convertinventory to FIFO accounting when LIFO costing is used; and we include unrealized gains and losses on available-for-salesecurities in earnings (financial services companies only). For more information on these adjustments and others, as well asadditional background, please see Introducing Modelware: A Road Map for Investors, by Trevor Harris and team, August 2,2004.


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Analyst CertificationThe following analysts hereby certify that their views about the companies and their securities discussed in this report areaccurately expressed and that they have not received and will not receive direct or indirect compensation in exchange forexpressing specific recommendations or views in this report: William Pecoriello.

Important US Regulatory Disclosures on Subject CompaniesThe information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively,"Morgan Stanley").As of June 30, 2004, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the followingcompanies covered in this report: Avon Products and Kimberly-Clark.Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Procter & Gamble andGillette.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Procter & Gamble,Colgate-Palmolive, Gillette and Kimberly-Clark.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from

Procter & Gamble, Avon Products, Colgate-Palmolive, Gillette and Kimberly-Clark.Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment bankingservices from Avon Products, Colgate-Palmolive, Gillette and Kimberly-Clark.Within the last 12 months, Morgan Stanley has either provided or currently is providing investment banking services to thefollowing companies covered in this report Procter & Gamble, Avon Products, Colgate-Palmolive, Gillette and Kimberly-Clark.Within the last 12 months, Morgan Stanley has either provided or currently is providing non-investment banking, securitiesrelated services to and/or in the past has entered into an agreement to provide services or currently has a client relatedrelationship with the following companies covered in this report Procter & Gamble, Avon Products, Colgate-Palmolive, Gilletteand Kimberly-Clark.The research analysts, strategists, or research associates principally responsible for the preparation of this research report havereceived compensation based upon various factors, including quality of research, investor client feedback, stock picking,competitive factors, firm revenues and overall investment banking revenues.


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Stock RatingsDifferent securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example,Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). Arating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions ofall ratings used in each research report. In addition, since the research report contains more complete information concerning the analystsviews, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (orresearch) should not be used or relied upon as investment advice. An investors decision to buy or sell a stock should depend on individualcircumstances (such as the investors existing holdings) and other considerations.

Global Stock Ratings Distribution(as of July 31, 2004)

Coverage Universe Investment Banking Clients (IBC)

Stock Rating Category Count% ofTotal Count

% of Total IBC

% of RatingCategory

Overweight/Buy 638 36% 271 41% 42%Equal-weight/Hold 800 45% 297 45% 37%Underweight/Sell 349 20% 94 14% 27%Total 1,787 662

Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that

Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommendedrelative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existingholdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation inthe last 12 months.

Analyst Stock RatingsOverweight (O). The stocks total return is expected to exceed the average total return of the analysts industry (or industryteams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Equal-weight (E). The stocks total return is expected to be in line with the average total return of the analysts industry (orindustry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.Underweight (U). The stocks total return is expected to be below the average total return of the analysts industry (or industryteams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% ina month, based on a quantitative assessment of historical data, or in the analysts view, it is likely to become materially morevolatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history areautomatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "morevolatile" can still perform in that manner.Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go towww.morganstanley.com/companycharts.

Analyst Industry ViewsAttractive (A). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to beattractive vs. the relevant broad market benchmark named on the cover of this report.In-Line (I). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in

line with the relevant broad market benchmark named on the cover of this report.Cautious (C). The analyst views the performance of his or her industry coverage universe over the next 12-18 months withcaution vs. the relevant broad market benchmark named on the cover of this report.

Stock price charts and rating histories for companies discussed in this report are also available atwww.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585

Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.


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Stock Price, Price Target and Rating History (See Rating Definitions)


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Other Important DisclosuresThis research report has been published in accordance with our conflict management policy, which is available atwww.morganstanley.com/institutional/research/conflictpolicies.

For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and therisks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research isavailable through your sales representative or on Client Link at www.morganstanley.com and other electronic systems.This report does not provide individually tailored investment advice. It has been prepared without regard to the individualfinancial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable forall investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, andencourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy willdepend on an investors individual circumstances and objectives.This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdingsdisclosed in the section entitled "Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or itsemployees not involved in the preparation of this report may have investments in securities or derivatives of securities ofcompanies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may

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INDUSTRY COVERAGE: HOUSEHOLD & PERSONAL CARE

Company TickerRatingas of

Priceat 08/02/04

Avon Products AVP.N O 07/06/04 $43.23Colgate-Palmolive CL.N O 10/31/03 $53.34Gillette G.N U 09/11/03 $39.12

Company TickerRatingas of

Priceat 08/02/04

Kimberly-Clark KMB.N U 01/06/04 $64.98Procter & Gamble PG.N E 09/11/03 $53.34Stock ratings are subject to change. Please see latest research for each company.

PG Analyst Report

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