RBC: Procter & Gamble Needs 4-5% Revenue Growth To Justify Its Relative Alpha, Something That's Not Possible For Now

Procter & Gamble Co PG seems to be finally making efforts to achieve a turnaround. RBC Capital Markets’ Nik Modi maintained a Sector Perform rating for the company, with a price target of $76.

Addressing Key Concerns

Over the past five years, Procter & Gamble has been losing share across most of its categories as well as geographies, despite making several attempts to fix the problem, with new management, increased advertising spend and cost savings. Owing to these factors, shares have underperformed the S&P 500 by 22 percent and consumer staples by 43 percent.

“Our focus has been on the underlying causes of this top line underperformance, including an ineffective organization design, risk averse culture, poor levels of internal accountability and deteriorating weighted purchase intent metrics relative to competition (across important brands/geographies),” analyst Nik Modi wrote.

He added, however, that since the appointment of David Taylor as CEO, there is greater optimistic surrounding the company being on the right track to “sustainably turning around the business from the inside out.”

Valuation

The mega caps have recently outperformed the broader market. While Procter & Gamble’s US business as well as forex seems to be stabilizing, the stock valuation already reflects about 3 percent revenue growth, which is higher than what the company is currently generating.

“To justify relative alpha in PG today, we believe we would need to see top line in the 4-5% range—a goal that looks out of reach for now,” Modi commented.