Procter & Gamble: Undervalued After Recent Earnings Decline and Share Price Drop

Procter & Gamble's stock has declined 4% over the past year, but is up 30% over five years. The company's annual revenue and net income are still growing, and the current share price is 7.5% below the average analyst price target. Based on six valuation checks, Procter & Gamble scores a 3, indicating it is undervalued in three out of six measures. However, a Discounted Cash Flow analysis shows shares are currently undervalued by 16.5% based on future cash flow projections.

Procter & Gamble (PG) has seen its stock price fluctuate over the past year, with a 4% decline, yet it has experienced a 30% increase over the last five years. The company's annual revenue and net income continue to grow, indicating a strong financial foundation. Despite this, the current share price is 7.5% below the average analyst price target, suggesting a potential undervaluation [1].

Six valuation checks indicate that Procter & Gamble is undervalued in three out of six measures, which may attract investors weighing risk against reward. However, a Discounted Cash Flow (DCF) analysis reveals a more nuanced picture, showing that shares are currently undervalued by 16.5% based on future cash flow projections [2].

The DCF approach estimates a company’s true value by projecting future cash flows and discounting them back to today’s dollars. For Procter & Gamble, the latest twelve months’ Free Cash Flow stands at $14.4 billion. Analysts expect this cash engine to keep growing, with projections reaching about $21.7 billion by 2035. Over the coming decade, estimates indicate steady year-over-year increases, highlighting the company’s strength in maintaining healthy cash generation. After running these numbers through a two-stage DCF model, the resulting intrinsic value per share is $190.12, representing a 16.5% undervaluation compared to the market price [2].

The Price-to-Earnings (PE) ratio, another widely used valuation tool, also suggests undervaluation. Procter & Gamble currently trades at a PE ratio of 23.7x, which is higher than the Household Products industry average of 18.0x but below the peer group average of 26.0x. The proprietary Fair Ratio, calculated by considering factors such as earnings quality, growth, profit margin, and company size, is 29.2x for Procter & Gamble, suggesting the market may not be fully accounting for the company’s strengths [2].

In addition to these valuation metrics, Procter & Gamble's narrative offers two perspectives: a bull case and a bear case. The bull case expects product innovation and investment to drive market share and future revenue growth, while the bear case projects slower revenue and cash flow growth as the business matures. Both narratives highlight the company's resilience and potential for growth, albeit with different levels of optimism [2].

In conclusion, Procter & Gamble's valuation picture is mixed, with some indicators suggesting undervaluation while others point to a fair or slightly overvalued position. Investors should consider these factors alongside their own narratives and risk tolerance before making a decision.

References:
[1] https://seekingalpha.com/news/4488101-procter-gamble-reports-insider-transaction-worth-135m
[2] https://finance.yahoo.com/news/procter-gamble-offering-value-recent-101629818.html