Student Investment Fund Stock Report Analysts: Janel Logan, Amanda Repp and Padma Venkatraman Business Summary Procter & Gamble, founded in 1837 and based in Cincinnati, OH, is recognized as the world's largest producer and distributor of household and personal products. PG is organized into three global business units: Beauty; Health and Well‐Being; and Household Care. PG Procter and Gamble operates in over 80 countries and offers products and services to more than 180 countries worldwide. PG has a strong global market presence. In 2009, PG generated 61% of its total sales in international markets. Procter & Gamble NYSE: PG Highlights PG is focused on developing its consumer understanding, marketing, and brand‐building techniques. PG manages 23 brands that individually generate over $1 billion in annual sales and 20 brands that individually generate half of a billion in annual sales. 12 of PG’s billion‐dollar brands are currently the #1 global market share leader in their respective product categories. Investment Thesis Concerns over a sluggish economy in 2010 led us to PG — we favor large‐capitalization, low beta, defensive stocks that pay above‐average dividends and have strong growth potential in foreign markets. PG is the best consumer staples stock in terms of brand management, innovation and consumer understanding. Procter and Gamble has superior financial standing and has provided shareholders with substantial value creation over time. Price Performance Recommendation: LongTerm Buy Recent Price (12/04/09): $62.60 Sector: Consumer Staples Target Price: $65.53 Sub‐Sector: Consumer Goods 52‐Week Range: $43.93‐ $64.00 Stock Classification: Classic Growth Market Capt: $178 B Institutional Ownership: 58% P/E Ratio: 17.4 Dividend Yield: 2.8% Earnings per Share: $4.58 Beta: 0.6
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Student Investment Fund Stock Report Analysts: Janel Logan, Amanda Repp and Padma Venkatraman
Business Summary
Procter & Gamble, founded in
1837 and based in Cincinnati, OH,
is recognized as the world's largest
producer and distributor of
household and personal products.
PG is organized into three global
business units: Beauty; Health and
Well‐Being; and Household Care.
PG Procter and Gamble operates
in over 80 countries and offers
products and services to more
than 180 countries worldwide. PG
has a strong global market
presence. In 2009, PG generated
61% of its total sales in
international markets.
Procter & Gamble NYSE: PG
Highlights
PG is focused on developing its consumer understanding,
marketing, and brand‐building
techniques.
PG manages 23 brands that
individually generate over $1
billion in annual sales and 20
brands that individually generate
half of a billion in annual sales.
12 of PG’s billion‐dollar brands are currently the #1 global market share
leader in their respective product
categories.
Investment Thesis
Concerns over a sluggish economy in 2010 led us to PG — we
favor large‐capitalization, low beta, defensive stocks that pay
above‐average dividends and have strong growth potential in
foreign markets.
PG is the best consumer staples stock in terms of brand
management, innovation and consumer understanding.
Procter and Gamble has superior financial standing and has
provided shareholders with substantial value creation over time.
PG is organized into three global business units: Beauty, Health and Well‐Being, and Household Care.
BEAUTY Includes two sub‐segments: o Beauty (2009 Sales $18.79 B, 23.7% of sales revenue) — cosmetics, deodorants, hair
care, personal cleansing, prestige, fragrances and skin care products
Billion‐dollar brands include: Head & Shoulders, Olay, Pantene and Wella o Grooming (2009 Sales $7.54 B, 9.54% of sales revenue) — blades and razors, electric
hair removal devices, facial products, shave products and home appliances
Billion‐dollar brands include: Braun, Fusion, Gillette and Mach 3
HEALTH AND WELL‐BEING Includes two sub‐segments: o Health Care (2009 Sales $13.62 B, 17.23% of sales revenue) — feminine care, oral care
and personal health care products
Billion‐dollar brands include: Actonel, Always, Crest and Oral‐B
o Snacks and Pet Care (2009 Sales $3.11 B, 3.94% of sales revenue)—pet food and snacks
Billon‐dollar brands include: Iams and Pringles
HOUSEHOLD CARE Includes two sub‐segments:
o Fabric Care and Home Care (2009 Sales $23.19 B, 29.33% of sales revenue)—air care, batteries, dish care, fabric care and surface care
Billion‐dollar brands include: Ariel, Dawn, Downy, Duracell, Gain and Tide
o Baby Care and Family Care (2009 Sales $14.10 B, 17.84% of sales revenue)—baby wipes, bath tissues, diapers, facial tissues and paper towels
Billion‐dollar brands include: Bounty, Charmin and Pampers
Student Investment Fund: Procter & Gamble
Business Divestures
Procter and Gamble has recently divested two of its business segments in order to refocus on its core business segments and to continue to maintain its strong portfolio of brands.
Folgers: On June 4, 2008, PG sold its Folgers coffee unit to J.M. Smucker Company in an all‐stock deal worth approximately $2.95 billion.
Pharmaceuticals: In 2006, the company began winding down its discover‐phase pharmaceutical products in favor of licensing late‐stage compounds, and announced in 2008 it would exit the drug industry entirely. In 2009, PG sold its pharmaceutical unit to Warner Chilcott in a $3.1 billion cash deal. As a result of the divesture, Procter and Gamble expects to book a 43 cent per share earnings boost in the second quarter of fiscal year 2010.
These divestures will allow PG to primarily focus on its personal care, beauty, and household product divisions. Moreover, it is our assessment that these divestures reveal Procter and Gamble’s strong focus on maintaining a solid portfolio of brands that add value for the company rather than growing for growth's sake.
Consistency in Top Management
Procter and Gamble recently named Robert McDonald as president and CEO, succeeding A.G. Lafley, effective as of July 2009. The new CEO Robert McDonald, otherwise known as Bob McDonald, comes into the position with a rich company background. McDonald previously served as Vice Chair of PG’s Global Business Units and Operations. Furthermore, McDonald has vast experience in brand‐building and market development, and has over 30 years of experience with Procter and Gamble. The news of Bob McDonald being named CEO of the company, shortly followed the announcement of PG’s CFO Clayt Daley’s retirement. Daley was replaced January 1, 2009 by Jon Moeller. Prior to accepting the new CFO position, Moeller previously served as the Vice President and Treasurer of Procter and Gamble. Moeller also served as Vice President of Finance and Accounting in various global business units within the company. Similar to McDonald, Moeller has developed a rich history at Procter and Gamble. Looking forward, Procter and Gamble can remain confident in their recent changes in top management. Both executive successors are individuals who have a thorough and well‐developed understanding of the company’s core businesses and international markets, gained through many years of experience with Procter and Gamble.
Student Investment Fund: Procter & Gamble
Competitors
Procter and Gamble provides largest and broadest portfolio of products in the household and personal care industry with 24 billion dollar brands. PG generates 43% more revenue than its closest competitor, Unilever (UL). PG also maintains a relatively high operating margin of 20.46% in 2009, the highest amongst its competitors. Moreover, the company invests more than $2 billion annually in Research and Development —nearly twice that of Unilever, and equal to the combined total of its other major competitors — Avon, Clorox Company (CLX), Colgate‐Palmolive Company (CL), Energizer Holdings (ENR), Henkel, Kimberly‐Clark (KMB), L'Oreal, and Reckitt Benckiser.
REVENUE
(IN MILLIONS)
NET INCOME (IN MILLIONS)
OPERATING MARGIN
DIVIDEND YIELD
BILLION DOLLAR BRAND(S)
PROCTER & GAMBLE
$79,029
$11,010
20.79% 3.0%
PAMPERS, PANTENE, CREST, TIDE, BOUNTY, DURACELL,
CHARMIN
UNILEVER
$56,546
$7,015 N/A
1.38%
DOVE, AXE, LIPTON, VASELINE, SLIM‐FAST, BEN & JERRY’S
CLOROX COMPANY
$5,440
$566
20.12%
3.3%
CLOROX BLEACH, PINE‐SOL, GLAD, BRITA WATER FILTERS,
BURT’S BEES
KIMBERLY –
CLARK
$18,730
$,1810
15.95%
3.8%
HUGGIES, KLEENEX, SCOTT PAPER TOWELS
COLGATE – PALMOLIVE
$1,4910
$2,310
22.68%
2.2%
COLGATE TOOTHPASTE,PALMOLIVE DISHWASHING
LIQUID, SOFTSOAP, SPEEDSTICK
Student Investment Fund: Procter & Gamble
Global Presence
Procter and Gamble operates in over 80 countries and offers products and services in more than 180 countries worldwide. Sales are divided into four main segments:
North America accounted for 44% of total sales in 2009 or $34.8 billion.
Western Europe accounted for 22% of total sales in 2009 or $17.4 billion.
North East Asia accounted for 4% of total sales in 2009 or $3.2 billion.
Developing Markets accounted for 30% of total sales in 2009 or $23.7 billion.
Student Investment Fund: Procter & Gamble
Where to Play:
1) Grow leading, global brands and core categories
2) Build business with underserved and unserved consumers
3) Continue to grow and develop faster‐growing, structurally attractive businesses with
global leadership potential
Currently, international sales (sales outside of North America) generate roughly 61% of Procter and Gamble’s total revenue. Over the past five years, the average growth rate for PG’s international sales was 12% — which is almost three times that of PG’s domestic market sales growth of 5%. In recent years, Procter and Gamble has heavily penetrated developing markets. Developing markets include Latin America, Central & Eastern Europe/Middle East and Africa, Greater China and ASEAN/Australasia/India/Korea. Procter and Gamble’s sales in developing markets comprise 30% of its total sales revenue‐‐ up a significant 20% since the beginning of the decade.
International Market Share
Procter and Gamble maintains a strong focus on its market share, as this is a key factor for success in the Consumer Staples sector in which they compete in. Each firm must compete for market share and viability of growing future sales for the company. As economies around the world continue to recover following the global downturn, Procter and Gamble recognizes that it is pertinent to have an established market share in order to take advantage of new growth opportunities and increase their sales in the future. Developing markets currently make up 86% of the world’s population. Procter and Gamble has already established a strong market share in the most crucial areas of these developing markets: Central & Eastern Europe, Middle East & Africa Region, Latin America, Greater China and Developing Asia. It is important that PG takes advantage of opportunities in these particular markets as these areas provide the largest international growth opportunities. Procter and Gamble has established themselves as the leader in market share in the Blades and Razors markets. They are also first and second in market share in the Shampoos and Diapers markets, respectively. Additionally, they maintain first, second and third market share positions in the Laundry, Feminine Care and Oral Care product markets, respectively.
PurposedInspired Macro Strategy for Growth
Procter and Gamble is taking a focused approach towards its growth opportunities. PG looks to grow its leading, global brands and core categories. PG will achieve this by narrowing the focus of their portfolio. The recent divesture of their pharmaceutical business is just one example of how they are narrowing their focus. This will allow PG to focus more heavily on their 43 billion and half‐billion dollar brands that generate 85% of their revenues. Furthermore, focusing on the expansion of these 43 core brands into markets, where they are currently underrepresented.
Student Investment Fund: Procter & Gamble
Another focus for Procter and Gamble is on building its business through underserved and unserved consumers. As previously mentioned, developing markets make up more than 86% of the world’s population. PG’s sales in developing markets totaled nearly $24 billion in 2009 — nearly five times greater than their average competitor’s sales in developing markets. Procter and Gamble continues to aim towards growing its current 19% share in developing markets. This allows an attractive opportunity for PG to further its growth outreach. In a recent interview with Fortune Magazine, Procter and Gamble’s CEO Bob McDonald explained that the company currently serves approximately 3.84 billion of the world’s 7.5 billion total population. Moreover, McDonald expressed PG’s plans to add 1 billion more customers over the next five years.
PG’s final strategy takes a focused approach towards growing structurally‐sound businesses, rather than growing for growth’s sake. The company maintains a solid strategy for future growth that adds value.
Key Strategies for Success
Consumer Understanding o Each year, Procter and Gamble interacts with nearly 5 million consumers in over 60 countries
worldwide. o It is important for Procter and Gamble to gain insight on consumer understanding in order to
discover innovation opportunities and to find ways in which the company can better serve its customers. It is especially important for PG to recognize and adjust to cultural differences among its international markets.
Brand Building o Procter and Gamble currently has 23 brands within its product portfolio that individually
generate over one billion dollars in sales annually. PG also has 20 brands that generate half of a billion dollars in annual sales. Combined, these 43 brands account for 85% of PG’s total sales and 90% of PG’s profit. PG maintains the strongest‐performing portfolio of brands within its industry. Moreover, PG maintains its key competitive advantage for the overall success of the firm.
Innovation o Procter and Gamble is the industry leader in terms of innovation. Each year in the U.S., the IRI
New Product Pacesetter Report ranks the best selling new products within the consumer market. Over the past 14 years, Procter and Gamble has had 114 top 25 pacesetters—more than six times the number of pacesetters of their largest competitors combined. (Pacesetter is defined as a new, innovative Consumer Packaged Brand that exceeds $7.5 M in its first year).
Established Go‐To‐Market Capability o Procter and Gamble is ranked as the preferred supplier and industry leader in a wide range of
capabilities including clearest company strategy, brands most important to retailers, strong business fundamentals and innovative marketing programs.
Scale o Procter and Gamble is able to take advantage of its ability to operate on a large scale. This
allows PG to share processes and procedures among the categories under which they operate. This also creates the ability for PG to capitalize on its international expansion opportunities since they have the capabilities and resources for such ventures.
Student Investment Fund: Procter & Gamble
Valuation Analysis
Our valuation analysis for PG was conducted using conservative model assumptions. Our discounted cash flow model estimates PG’s intrinsic value at $65.53 per share for 2009, reaching $82.91 by 2019.
Income Statement Inputs:
Revenue Growth: Despite having a solid 5‐year historical growth of 8.6%, PG faced revenue growth of ‐3.3% during 2009. In 2009, PG saw the adverse affects of a weak consumer spending environment, which was exacerbated by its inability to further lower prices on its higher‐priced premium products during the recession. We therefore forecasted revenue growth on a year‐to‐year basis. For 2010, we again penalized PG’s revenue growth to a level of ‐3%, and used ‐2% in 2011. We expect PG’s revenue growth to bounce back out of the recession with a moderate growth rate of 5% in 2012. Following 2012, we forecast the growth of revenue to taper down to a long‐term growth rate of 3% by 2019. Selling, General and Administrative Expenses: PG’s historical average SG&A/Sales expense was 30.4%. For our forecast, we increased SG&A/Sales to 32% due to PG’s stated intention to increase advertising expenditures in the future. Cost of Goods Sold: PG operated with a historical average COGS/Sales of 48.6%. This average was maintained throughout the forecasted years. Research and Development: PG charges its R&D costs to its SG&A expenses, which is primarily why R&D/Sales were 0% as of the past three years. We maintained .5% R&D/Sales for the forecast. Tax Rate: Since PG’s tax rate has been steadily declining from its 30.6% high in 2005, we maintained its historical average rate of 28.2% for the forecasted years. Share Growth: In 2007, PG announced its plan for a repurchase of $24‐$30 billion of its common stock through 2010. Therefore, we held PG’s share growth to 0% through the forecasted years.
Dividend Growth: Despite a solid historical year‐to‐year dividend growth rate of 16.9%, dividend growth has been decreasing from its 2005 high of 37% growth to more moderate measures. Forecasted dividend growth was reduced to a level of 10% for the forecast.
Balance Statement Inputs:
Property, Plant and Equipment: PG’s five‐year historical average PPE/Sales of 25.8% and has been improving over the past three years. Despite PG’s recent efficiency with managing its capital investments, we steadily grew PPE/Sales throughout our forecast from 24.0% in 2010 to 26% by 2019. This more accurately reflects its historical average and reflects more of a worst‐case scenario assumption.
Capital Asset Pricing Model
Cost of Equity: Cost of equity of 7.85% was calculated using a risk‐free rate of 4.25%, market risk premium of 6% and beta of 0.6. Conducting a regression analysis on PG’s historical prices since 2002 yielded a beta estimate of .49. To maintain conservatism in our model, we increased the beta estimate to 0.6 to allow for reversion to the mean.
Weighted Average Cost of Capital Assumptions
Weighted Average Cost of Capital: WACC of 7.4% was calculated using costs of 2.7% in short‐term debt and 5.28% in long‐term debt. Cost of equity was calculated at 7.85% as described above.
Long‐term Horizon Value Growth Rate: We applied a long‐term horizon growth rate of 3% for PG to maintain a conservative outlook for the company's long‐term prospects.
Student Investment Fund: Procter & Gamble
Profitability
Returns: PG maintains stable levels of returns on assets and equity throughout the forecast. PG generated a historical average 8.7% return on assets. This 8.7% is slightly compressed to an average 8% return on assets through 2019. PG also generated an average 21.1% return on equity over the past five years. Our conservative modeling approach is reflected in a narrowing of PG’s average return on equity to 14% throughout the forecasted years. Earnings Per Share & Dividends Per Share: PG's ability to generate profits for shareholders is reflected in its earnings per share and dividends per share metrics. PG generated a historical average growth in earnings per share of 8.1%. While our conservative model reduces this rate to nearly a quarter of its historical average EPS growth, PG’s forecasted EPS growth remains a positive 2.2% through 2019. PG also delivered a modest historical average DPS of 11.4% to its shareholders. PG’s DPS was tightened to a level of 8.2% annual growth for the forecast. Even compressed to these rates, PG manages to grow both EPS and DPS at healthy and sustainable levels through 2019.
Value Creation Metrics
Free Cash Flow: Over the past five years, PG has successfully shown its ability to create free cash flow. After growing at a historical yearly average rate of 17.7%, PG’s FCF was drastically reduced to a sustainable level of 2.7% average growth for the forecast. Net Operating Profit After Tax: Historically, PG has grown its NOPAT at an average rate of 11.03%. Following a significant reduction in NOPAT in 2010, we forecast NOPAT to grow at an average yearly growth rate of 3%.
Student Investment Fund: Procter & Gamble
Economic Value Added: In 2009, PG created $10.2 billion in economic profit. Our forecast tightens EVA to $8.7 billion and $8.5 billion in 2010 and 2011, respectively. This decrease in EVA was due to our projected forecasts of ‐3% and ‐2% revenue growth for the years, in respective order. Despite this dip, economic profit for PG grows at a steady average rate of 3% per year for the forecast.
Market Value Added: PG created MVA of $143.4 billion in 2009. For 2010, this metric grew to $148 billion. PG’s MVA is projected to continue its growth at a yearly rate of 3% through 2019.
Value Spread: ROIC vs. WACC
ROIC: Historical average return on invested capital was 46.7% for PG. In 2009, generated a significantly higher ROIC of 54.4%. For the forecast, ROIC was slimmed to an average 42.4% through 2019. WACC: Weighted average cost of capital was calculated at 7.4%. As described above, the risk‐free rate, beta, and market risk premium were increased to maintain conservatism. Value Spread (ROIC‐WACC): Procter and Gamble’s historical average value spread was 39.9%. In 2009, PG’s value spread was 44%. PG’s forecasted value spread averages 35%. Even with a considerably lower forecasted value spread, PG displays considerable potential to further increase its value creation beyond our forecasted ROIC‐WACC spread measure.
Student Investment Fund: Procter & Gamble
Relative Valuation
Price‐to‐Earnings: Procter and Gamble currently trades at a lower PE multiple of 13.5, which is lower than two of its top competitors, Colgate Palmolive (CL) and Clorox (CLX), with PE multiples of 19 and 15 respectively. Price‐to‐Cash Flow: PG’s price‐to‐cash flow of 11 is an additional relative valuation metric that favors PG compared to Colgate Palmolive’s significantly higher PCF of 16; Clorox’s PCF is also 11.
Valuation Measures
Altman Z‐Score Test for Bankruptcy: The Altman Z‐Score was developed to predict a company’s likelihood of bankruptcy using five financial metrics. Companies scoring above 2.9 are considered to be financially healthy. Lower scores reflect a higher likelihood of failure of a firm. Historically, PG scored an average 3.19—well above the safe zone. Procter and Gamble also scored in the safe zone with an average 3.92 for the forecast.
Piotroski ‘s Financial Fitness Scorecard This scorecard evaluates companies based on income statement and balance sheet performance. Firms can score up to a maximum of 11 points. Historically, Procter and Gamble scored an average of 7 out 11. PG’s average score for the forecasted years is 8 out of 11, which suggests increased financial stability through 2019.
Student Investment Fund: Procter & Gamble
Graham and Dodd Thomson Reuters’ metric is computed using a Graham and Dodd approach to valuation. PG, ranked in the 7th Decile, indicates that Procter and Gamble’s investors are paying a lower premium for future earnings than 70% of investors in the S&P 500. This is indicative of undervaluation.
Earnings Momentum Procter and Gamble has favorable earnings momentum despite recent tough economic times. PG’s earnings momentum is better than 87% of stocks in the S&P 500.
Other Analysts Recommendation Ranked on a scale from 1 to 5 (1 being a strong by and 5 being a strong sell) PG has a mean analysts recommendation of 1.9, indicating a buy signal from analysts
Correlation with Student Investment Fund Stocks Correlations are calculated between stock returns to reveal how investments move in relation to one another within a portfolio. Low correlations are favorable and indicate a weak relation in performance between two equities. In order to ensure Procter and Gamble would fit favorably into Washburn’s Student Investment Fund, we ran a correlation of Procter and Gamble’s historical returns since 2004 with respect to the historical returns of stocks currently held in the SIF over the same time period. Procter and Gamble’s strongest correlation of .49 was shared between Johnson and Johnson (JNJ) and United Technologies Incorporated (UTX). PG's low correlation with the rest of the portfolio should ensure the Student Investment Fund maintains its lower‐than‐average beta exposure.
Insider Trading Over time, net insiders tend to sell off their positions in order to diversify their holdings. Most recently, PG’s net insiders have slowed the selling of their positions. Overall, net insiders have divested an aggregate $43 million since 2004.
Days to Cover This ratio measures the period of time it will take short sellers to cover their positions relative to the stock’s total trading volume. As of January 2006, PG’s stable days to cover ratio remains low, suggesting short sellers have little interest in the stock.
Procter and Gamble Technical Appendix, Page 1 of 8
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394041424344454647484950515253545556
A B C D E F G H I J K L M N
Enter Firm Ticker PG
Enter first financial statement year in cell B6 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Average ManualTotal revenue 56,741 68,222 74,832 81,748 79,029 Revenue Growth 20.2% 9.7% 9.2% -3.3% 8.6%
Cost of goods sold 27,872 33,125 35,659 39,536 38,898 COGS % of Sales 49.1% 48.6% 47.7% 48.4% 49.2% 48.6%
Too unpredictable to forecast, set to zero in the forecast
Too unpredictable to forecast, set to zero in the forecast
Forecasting PercentagesHistorical Income Statements
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Procter and Gamble Technical Appendix, Page 2 of 8
Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period.
Procter and Gamble Technical Appendix, Page 3 of 8
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394041424344454647484950515253545556
AA AB AC AD AE AF AG AH AI AJ AK AL AM AN
Enter Firm Ticker PG
year 2005 2006 2007 2008 2009 2005 2006 2007 2008 2009 Average ManualAssets PPE Growth 31.0% 4.1% 5.6% -5.7% 1.2%
Other current assets, total 1,081 1,611 1,727 2,012 1,209 Other CA % of Sales 1.9% 2.4% 2.3% 2.5% 1.5% 2.1%
Total Current Assets 20,329 24,329 24,031 24,515 21,905Property, plant and equipment (net) 14,332 18,770 19,540 20,640 19,462 Net PPE % of Sales 25.3% 27.5% 26.1% 25.2% 24.6% 25.8%
Set to last historical year's level throughout the forecasts.Set to last historical year's level throughout the forecasts.
LT debt is manually adjusted for AFN in the pro formas
Forecasting Percentages
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future.
The model uses the more conservative diluted common shares number for total shares outstanding.
Procter and Gamble Technical Appendix, Page 4 of 8
Total Shareholders' Equity 67,824 72,020 76,196 80,234 84,030 87,513 90,523 92,950 94,682 95,592Total Liabilities and Shareholders' Equity 128,140 125,713 130,906 138,279 143,810 149,563 155,725 160,396 165,208 170,164Total common shares (diluted) 3,154 3,154 3,154 3,154 3,154 3,154 3,154 3,154 3,154 3,154Total preferred shares outstanding 0 0 0 0 0 0 0 0 0 0AFN (interactive with 3 items below) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Adjustment to LT Debt (use Goal Seek) (6,028.4) (5,708.8) (1,221.9) 984.3 (239.5) 215.1 1,283.4 586.7 1,372.4 2,287.6Issue Common Stock to Fund AFNSet Balance Sheet Cash Lower to Fund AFN 6,800.0 6,800
Forecasted Balance Sheets -- 10 Years
Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49
Procter and Gamble Technical Appendix, Page 5 of 8
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394041424344454647484950515253545556
BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BPEnter Firm Ticker PG
Weighted Average Cost of Capital 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4%
Net Operating Working Capital (NOWC) 4,247 4,212 3,506 1,561 3,638 4,735 4,776 3,921 4,118 4,282 4,454 4,609 4,748 4,890 5,037
Operating Long Term Assets 14,332 18,770 19,540 20,640 19,462 18,398 18,030 18,931 20,706 21,535 22,396 24,107 24,830 25,575 26,342
Total Operating Capital 18,579 22,982 23,046 22,201 23,100 23,133 22,806 22,853 24,824 25,817 26,850 28,716 29,578 30,465 31,379
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019Long-term Horizon Value Growth Rate (user-supplied) 3.00%PV of Forecasted FCF, discounted at 7.40% $222,563 $228,656 $235,048 $241,777 $250,391 $258,216 $266,191 $275,166 $283,420 $291,923 $300,681Value of Non-Operating Assets $4,781 $7,610 $7,594 $6,880 $7,224 $7,513 $7,814 $8,087 $8,330 $8,580 $8,837Total Intrinsic Value of the Firm $227,344 $236,266 $242,642 $248,657 $257,616 $265,729 $274,005 $283,253 $291,750 $300,503 $309,518Intrinsic Market Value of the Equity $206,692 $215,614 $221,990 $228,005 $236,964 $245,077 $253,353 $262,601 $271,098 $279,851 $288,866Per Share Intrinsic Value of the Firm $65.53 $68.36 $70.38 $72.29 $75.13 $77.70 $80.33 $83.26 $85.95 $88.73 $91.58MVA (market value added) $143,593 $147,789 $149,969 $151,809 $156,730 $161,047 $165,840 $172,078 $178,148 $185,169 $193,274
Item Value Percent Cost Weighted Cost Risk Free Rate 4.25%ST Debt (from most recent balance sheet) 0 0.00% 2.70% 0.00% Beta 0.60LT Debt (from most recent balance sheet) 20,652 11.05% 5.28% 0.42% Market Risk Prem. 6.00%MV Equity (look up stock's mkt. cap and enter in cell BB53 166,245 88.95% 7.85% 6.98% Cost of Equity 7.85%Weighted Average Cost of Capital 7.40%
Weighted Average Cost of Capital Calculations Capital Asset Pricing Model
Forecasted Ratios and Valuation Model -- 10 Years
Valuation Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- 10 Years
values in millions
Historical Ratios and Valuation Model
Valuation (in millions) -- through year 2019
Procter and Gamble Technical Appendix, Page 6 of 8
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394041424344454647484950515253545556
BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH
Historical Ratios and Valuation Forecasted Ratios and Valuation
Forecasted Stock Prices Based on Historical Multiples -- 10 Years
In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks ‐‐ P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year‐end stock prices and enter them in the first 5 (historical) years of the "per share value" category.2. Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG47‐BP47.3. Market capitalization will be calculated as basic weighted shares x historical year‐end prices and then forecasted basic weighted shares x DCF forecasted prices.4. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values.
$0
$15
$30
$45
$60
$75
$90
$105
$120
Forecasted Value Per Sh
are
Forecasted Per Share Stock Values
Low Price DCF Price High Price
$20
$30
$40
$50
$60
$70
$80
$90
$100
0
4
8
12
16
20
Historical or DCF Price
P/S and Ent. Value/EBITDA
Price/Sales and Enterprise Value/EBITDA vs. Price
Price/Sales Enterprise Value/EBITDA Historical or DCF Price
Procter and Gamble Technical Appendix, Page 7 of 8
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394041424344454647484950515253545556
CI CJ CK CL CM CN CO CP CQ CR CS CT CU CV CW CX CY CZ DA DB
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
0
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35
Dividend Yield
Price/Earnings Ratio
Price/Earnings Ratio and Dividend Yield
Price/Earnings Ratio Dividend Yield
0%5%10%15%20%25%30%35%40%45%50%55%60%
Gross M
argin
Gross, Operating and Net Profit Margins
Gross Margin Operating Margin Net Margin
0%5%10%15%20%25%30%35%40%45%50%55%60%
ROA, R
OE an
d ROIC
Return on Assets, Equity and Invested Capital
Return on Assets Return on Equity Return on Invested Capital
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
NOPAT an
d Free Cash Flow
NOPAT and Free Cash Flow (millions)
NOPAT Free Cash Flow
$50,000
$70,000
$90,000
$110,000
$130,000
$150,000
$170,000
$190,000
$210,000
$7,000 $7,500
$8,000 $8,500 $9,000 $9,500 $10,000 $10,500
$11,000 $11,500 $12,000
Market Value Added
Economic Value Added
Economic Value Added & Market Value Added (millions)
Economic Value Added Market Value Added
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
$4.00
$4.50
EPS an
d DPS
Earnings and Dividends Per Share
Earnings Per Share Dividends Per Share
Procter and Gamble Technical Appendix, Page 8 of 8
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394041424344454647484950515253545556
DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV