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Procter & Gamble and the Bill Ackman Effect

By Chad Fraser on January 29, 2013

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“It’s very hard to lose money, in our opinion, on P&G at the current share price.” 

—Bill Ackman, July 2012

Procter & Gamble (NYSE: PG) shares have risen about 12% since mid-July, when news broke that activist investor Bill Ackman, head of Pershing Square Capital Management, had poured $1.8 billion into the household goods maker’s stock.

At the time, Ackman was coming off a resounding victory in a proxy fight at Canadian Pacific Railway (NYSE: CP) in which he successfully landed seven seats on the company’s board. Since then, he’s managed to successfully push for the replacement of CP’s CEO with a veteran railroader named Hunter Harrison, helping send the stock up over 35% in the last six months alone.

Despite his big win at CP, few expected Ackman to be able to pull off that kind of turnaround at Procter & Gamble, whose shares had been in a holding pattern for roughly two years prior to his involvement. That’s partly because Ackman’s $1.8-billion buy-in was only enough to fetch him a roughly 1% stake in the corporate giant, whose market cap currently hovers around $201 billion.

Ackman, of course, has recently been in the news due to his very public short sale of 20 million shares of Herbalife (NYSE: HLF), which prompted fellow hedge fund managers Carl Icahn and Daniel Loeb to bet against him by snapping up Herbalife stock. That could put Ackman in a “short squeeze” if the share price moves higher, forcing the short sellers, including Ackman, to cover their positions. (Click here to read Investing Daily editor Jim Fink’s take on the Herbalife dust-up.)

The Herbalife adventure aside, big moves by Ackman are always worth watching, because, as CP demonstrates, he has the ability to increase shareholder value at the companies he targets. Trademark Ackman tactics include pushing for board representation, selling off less profitable assets and making key management changes.

Ackman’s Pronouncements on Procter & Gamble Grabbed Attention

P&G’s rising share price has a lot to do with the company’s improving outlook as the global economy picks up. But some of that gain undoubtedly has to do with the highly quotable Ackman, whose interest has attracted other investors to the stock. The shares jumped 4% alone on the day his interest was made public.

On January 16, he upped the pressure on Procter & Gamble when he publicly criticized current CEO Bob McDonald for the company’s lackluster performance. “It’s unlikely that Bob McDonald is the right CEO for the company, based on his track record there,” Ackman told CNN. Later, he added, “If the current senior team can’t do it, we expect the board to make a change.”

Procter & Gamble, for its part, has called Ackman’s comments an “unnecessary distraction,” as McDonald continues with his plan to cut $10 billion in expenses by 2016 and improve the company’s profitability in the face of rising raw material costs.

On Friday, however, Ackman let up on McDonald somewhat, after the company reported stronger-than-expected quarterly earnings.

“I think based on the past three years at P&G, it certainly looked like Bob is not the right guy for the company,” he told CNBC. “But if the company can make dramatic progress, and I think this quarter is an indication of very significant progress, then I hope Bob can be successful and can make it.”

P&G Rides Sales Rebound, Cost Cuts to Higher Profits

In the company’s fiscal 2013 second quarter, which concluded at the end of December, its sales rose 2%, to $22.18 billion from $21.74 billion a year earlier. Net income jumped 144%, to $4.06 billion, or $1.39 a share, from $1.69 billion, or $0.56. Setting aside restructuring charges and other unusual items from both periods, Procter & Gamble earned $1.22 a share, up 11.9% from $1.09 a year ago.

The company easily beat expectations on both the top and bottom lines: the consensus forecast called for $21.86 billion of revenue and $1.11 a share (excluding items) of earnings.

Procter & Gamble credited its improved market share, cost cuts and efficiency improvements for the gains. Selling, general and administrative expenses held steady during the quarter, while gross margins rose to 51.2% from 50.1%.

The company also increased its full-year earnings guidance to $3.97 to $4.07 a share on an adjusted basis, up 3% to 6% from its previous forecast of $3.80 to $4.00.

Ackman’s Influence Is Only One Reason to Like P&G

As we wrote in July, Ackman gazing over management’s shoulder should continue to be a good thing for the company’s shareholders, because he will push P&G to further streamline its business and increase sales. Ackman, for example, has already said that he “has candidates in mind” to succeed McDonald if he can’t “make it.”

Aside from a management change, Ackman could also exert pressure by pushing for a breakup of the company or a sale of some of its weaker divisions. IAMS pet food and Duracell batteries, for example, have been mentioned as candidates in the past. These two divisions alone could sell for about $7 billion.

But even if Ackman remains on the sidelines, Procter & Gamble still has lots of appeal, especially if you’re an income investor: its $0.56 quarterly dividend yields 3.05%, and the stock sports a beta rating of just 0.46, meaning it’s less than half as volatile as the overall market.

The stock’s trailing p/e (share price divided by the last 12 months of earnings) also clocks in at 18.9, lower than competitor Kimberly Clark Corp. (NYSE: KMB) and roughly in line with The Clorox Company (NYSE: CLX). P&G also said it plans to devote more cash to share buybacks this year. It has upped its outlook for repurchases to $5 billion to $6 billion from its previous estimate of $4 billion to $6 billion.

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  1. avatar
    frank Reply February 22, 2013 at 5:14 PM EDT

    I dislike the annoying moving ad on the lower right for Latest Free Reports. Surely it moves to get my attention, but believe me I would never respond to the obnoxious feature except to stop it