UL - Procter & Gamble: The Stock Is A Risky Investment In The Current Market

Summary

• Procter & Gamble is a multinational consumer goods company with a strong reputation in the fast-moving consumer goods (FMCG) industry.
• The current macroeconomic environment and overvalued sector may pose challenges for P&G, leading us to assign a sell rating.
• P&G has opportunities for expansion into emerging markets, innovation and new product development, diversification, strategic acquisitions, and maintaining a strong brand reputation.
• Risks for investing in P&G include economic downturns, competition, dependence on key brands, changes in consumer preferences, foreign exchange risks, and regulatory risks.

Intro

While Procter & Gamble ( PG ) has a history of strong performance and is generally considered a fantastic company, we believe that the current macroeconomic environment presents significant challenges for the company. In addition, the sector in which PG operates appears to be overvalued, which may be the result of investors seeking out "safe haven" stocks and driving up prices across the sector. Given these considerations, we currently rate PG as a sell.

Procter & Gamble: A Leading Consumer Goods Company with a Strong Reputation

Procter & Gamble is a multinational consumer goods corporation that was founded in 1837. The company is headquartered in Cincinnati, Ohio, and operates in more than 180 countries around the world. Procter & Gamble is one of the largest and most well-known consumer staple companies in the world, with a strong reputation in the fast-moving consumer goods (FMCG) industry.

Procter & Gamble offers a diverse range of products across various categories, including personal care, household care, health care, and beauty. Among these offerings are well-known and trusted brands such as Crest toothpaste, Pampers diapers, Pantene shampoo, Tide laundry detergent, Bounty paper towels, Crest mouthwash, Vicks cough medicine, Olay skin care, and CoverGirl makeup. The company's extensive product portfolio and reputation for quality give it a competitive advantage in the market.

PG operates through five major business segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care. The company's primary focus markets are North America, Greater China, and Northern Europe, while the rest of the world is considered enterprise markets. P&G has a diverse global presence, with a significant portion of its sales coming from emerging markets such as Asia, Africa, and Latin America.

P&G has a strong focus on sustainability and environmental responsibility. The company has set a number of environmental targets, including reducing its greenhouse gas emissions, water use, and waste, and increasing its use of renewable energy. P&G has also made significant investments in research and development in order to bring innovative, high-quality products to market.

Overall, P&G is a strong and well-respected company in the consumer goods industry, with a long history of delivering value to shareholders through its strong portfolio of brands, focus on innovation, and commitment to sustainability.

Opportunities for Procter & Gamble's Growth and Expansion

For the long term, we believe PG still has significant opportunities to expand and grow its business further. Some of the potential opportunities for PG are the following:

• Expansion into emerging markets: PG has a strong presence in developed markets, but there is potential for the company to tap into the growth opportunities in emerging markets, particularly in Asia and Latin America, where consumer demand for consumer goods is increasing.
• Innovation and new product development: PG has a strong track record of innovation and new product development, which has helped the company to stay ahead of its competitors. By continuing to innovate and bring new products to market, PG can drive sales and revenue growth.
• Diversification: PG is a large and diversified company, with a wide range of products in different categories. This diversification can provide a buffer against economic downturns in specific sectors or regions.
• Strategic acquisitions: PG has a history of making strategic acquisitions to add new products or enter new markets. By carefully evaluating potential acquisition targets, PG can expand its product offering and customer base.
• Strong brand reputation: PG has a strong reputation for quality and reliability, which can be a key advantage in the consumer goods industry. This reputation can help the company to attract and retain customers, and drive sales growth.

Risks to Consider when Investing in Procter & Gamble

Procter & Gamble is a multinational consumer goods company that operates in the fast-moving consumer goods (FMCG) industry. As with any investment, there are risks associated with investing in PG. Some of the main risks to consider include:

• Economic downturns: PG is exposed to economic downturns as consumer spending on non-essential goods tends to decline in times of economic uncertainty. This could lead to a decrease in demand for PG's products, which could negatively impact the company's financial performance.
• Competition: PG operates in a highly competitive market and faces competition from both established players and new entrants. This could lead to price wars, margin erosion, and reduced market share for PG.
• Dependence on key brands: PG has a portfolio of strong, well-known brands, but the company's financial performance is heavily dependent on the performance of these brands. If one or more of these brands experiences a decline in popularity or sales, it could negatively impact PG's overall financial performance.
• Changes in consumer preferences: PG's products are subject to changes in consumer preferences, and if consumers shift away from the types of products that PG offers, it could negatively impact the company's financial performance.
• Foreign exchange risks: PG operates in a global market and is exposed to foreign exchange risks. Changes in exchange rates can impact the company's financial performance, particularly if the U.S. dollar strengthens relative to other currencies, which has been the case over the last year.
• Regulatory risks: PG is subject to various regulations, including those related to product safety, labeling, and advertising. If the company fails to comply with these regulations, it could lead to fines, legal action, and damage to the company's reputation.

Why Procter & Gamble May Struggle in a Recession

Procter & Gamble is a multinational consumer goods company that has a long history and strong reputation in the fast-moving consumer goods (FMCG) industry. The company offers a wide range of products, including household and personal care items, food and beverage products, and beauty and personal care products. While PG has a strong track record and has been a solid performer in the past, we believe there are several reasons why the stock may decline in the upcoming months. First and foremost, the company is simply overvalued as is most of the consumer staples sector, ( XLP ) is currently trading close to an all-time high. But, you may ask, “Why PG?’ Well, we will do a few comparisons in the tables below, which shows why PG might be considered a bit overvalued.

Upon examining some of Procter & Gamble's key ratios, we observe the following. Overall, these ratios appear to be fairly strong, but it is possible that they may come under pressure in 2023

• FCF yield is currently 3.65%, which translates to a P/FCF multiple of about 27x.
• Gross margins are currently 47.23% indicating that PG has decent pricing power. It is important to mention that this is the lowest it has been in 10 years. Furthermore, this could decline further if the macroeconomics would continue to decline further.
• ROIC: 25.50%, this indicates that the company generates $25.50 for every $100 it invests.
• Procter & Gamble has a decent 5Y revenue CAGR of 3.52%, which is fairly low and not something we are generally looking for. But, given the size of PG this is decent.

In the table below, we compare the numbers for Procter & Gamble with the 5-year average for PG and the sector median. The data suggests that PG is relatively expensive compared to these benchmarks. PG's current numbers are significantly higher than its 5-year average and also higher than the sector median overall.

Now let's do this for some of their peers as well. In the table below we will compare Procter & Gamble with: Colgate-Palmolive Company ( CL ), Kimberly-Clark Corporation ( KMB ), Unilever ( UL ), and Nestlé ( OTCPK:NSRGY ).

When we take a look at the following numbers we can see that PG is more expensive than its competitors on most metrics. But, still we believe the sector remains overvalued as a whole.

One reason why PG may struggle in a recession is that consumer spending tends to decrease during economic downturns. As people become more financially cautious, they may be less likely to purchase non-essential items such as beauty and personal care products, leading to a decline in sales for PG. Most of their products are non-cyclical, so they won't suffer from a market decline, but the beauty segment could suffer, which would impact the revenues.

In addition, as unemployment rates rise during a recession (which hasn't been the case so far), consumers may be more inclined to switch to cheaper private label or generic products, which would negatively impact PG's sales.

Another factor that could contribute to a decline in PG's stock price in a recession is the company's reliance on developed markets, particularly North America and Europe. These markets tend to be more susceptible to economic downturns, and if a recession were to occur, PG's sales in these regions could be negatively impacted.

Important to mention is that Procter & Gamble is committed to maximizing cash efficiency and reducing costs as a means of driving long-term growth. The company thoroughly evaluates every expense item and has implemented several restructuring initiatives in the past, such as reducing the number of brands and product categories from 170 to 65, in order to achieve this goal. This could provide some strength.

In summary, while PG has been a solid performer in the past, there are several reasons why the stock may decline in a recession. A decrease in consumer spending, competition from cheaper private label and generic products, reliance on developed markets

Technical Analysis

Examining the short-term chart for Procter & Gamble, it appears that the stock is currently in overbought territory. Earnings for the company are set to be released on January 18th, which could potentially lead to significant price movements in the coming weeks.

Recently, PG appears to have come out of its downtrend, as it has made a higher high in recent weeks. The next potential resistance level would be at the $165 level, which also aligns with a Fibonacci (FIB) level. On the other hand, the immediate support level would be the $150 FIB level, and there is also a potential support line at $146.92.

However, given our belief that the stock is overvalued, as discussed earlier, we expect that the company may retest its October low of around $123 if the earnings do not meet expectations. If earnings were to decline in the coming quarters, we could potentially see the stock drop to the $111 FIB level or even lower, potentially reaching the $94-$100 range again in the worst case scenario.

Examining the long-term chart for Procter & Gamble, it appears that the stock is approaching overbought territory. Currently, the stock is trading above all of its weekly moving averages (WMAs), so it is likely that we will see a pullback towards these averages in the coming months. It will be important to pay attention to the upcoming earnings release, as this will provide insight into the company's direction heading into 2023. In particular, the guidance given by the company will be crucial in determining the stock's trajectory.

On the upside, it is possible that the stock could reach new all-time highs (ATHs). However, we believe that it is unlikely that the stock will be able to successfully retest the upper red trendline resistance in the coming year.

What Position To Take?

Based on our analysis, we believe that Procter & Gamble is currently overvalued and recommend short-selling the stock. As PG is generally viewed as a stable and safe investment, the borrow fee is relatively low at 25 basis points per year. To mitigate risk, we suggest implementing a stop loss in case of a sudden positive price movement. Another option to consider is using put options, specifically, a bear put spread, which allows us to limit both potential gains and losses. We think a vertical bear put spread will do the work just fine. A specific strategy we recommend is buying the July 21 '23 $150 Put and selling the July 21 '23 $130 Put, which offers a risk-reward ratio of 3 and would cost $489 to open. If the stock falls to $130 by expiration, the maximum profit would be $1,511, and the breakeven point would be at $145.11, as shown in the image below. More complex strategies are also possible, but for the purposes of this discussion, a vertical bear put spread should suffice.

Protecting Your Long-Term Position?

If you are a long-term investor and don't want to sell your shares it is also a possibility to protect yourself by buying puts, or something we would suggest, starting a collar strategy. The main purpose of the collar strategy is to protect against potential losses on a long stock position while also allowing for some potential upside.

With a collar you sell a call against your underlying and buy a put option, which acts as insurance in case of a decline in the stock price. At the same time, by selling a call option, the investor is able to generate income that can offset the cost of the put option, potentially resulting in a net credit.

Conclusion

It is worth noting that for investors with a long-term focus on dividends, it may be advisable to hold onto PG stock in order to avoid incurring significant capital gains taxes. However, for investors with a shorter time horizon, we believe that it may be advisable to sell PG stock and even consider short selling it.

In conclusion, Procter & Gamble is a well-respected and successful consumer goods company with a strong track record of performance and a commitment to sustainability, which will continue to benefit its investors in the long term. However, the current macroeconomic environment and overvaluation of the sector present significant challenges for the company. Given these factors, we believe PG is currently a sell as we expect the stock price to return to the mean as it might suffer in the upcoming year. That being said, there are still opportunities for PG to expand and grow its business through expansion into emerging markets, innovation and new product development, diversification, strategic acquisitions, and its strong brand reputation. However, these opportunities are accompanied by risks such as competition, supply chain disruptions, and currency fluctuations. It is important for investors to carefully consider these factors and conduct thorough due diligence before making any investment decisions.

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