Nelson Peltz’s Trian Fund Management is looking to accelerate change at Procter & Gamble Co (NYSE:PG). After accumulating at least $3.5 billion worth of PG stock (as of February), the hedge fund activist is trying to get one of his guys on the company’s board. Shares are up 3.7% in the past month.
Trian does not intend to break up P&G or replace current management, common activist investor tactics. Instead, Peltz seems to be content to apply pressure from within.
I would take any and all buy-side proclamations with a grain of salt, though. If breaking up PG or at least selling off some of its divisions proves the best way to realize higher valuations quickly, I doubt Peltz will hesitate to go in that direction.
PG’s existing portfolio of brands, like Tide, Olay, and Gillette, is indisputably strong. But growth is lacking, as is a pipeline of new products that could become billion-dollar brands. The innovation just hasn’t been there.
Since 2015, PG’s current strategy has been to thin out its portfolio and focus on growing a leaner number of strong brands. Some 43 beauty brands, including CoverGirl and Coty, have been spun off, and that was just the beginning.
The culling continues. PG management told the audience at last month’s Deutsche Bank Global Consumer Conference last month, the Cincinnati-based company now has about 170 brands. It wants to trim that number down to 65. This should translate into meaningful productivity improvements. In particular, cost reductions from office buildings to R&D centers to advertising will lead to sequential operating margin improvements.
Core Margins Improving
For the last three fiscal years, on a constant currency basis, core operating margin improved by 150 bps, 130 bps, and 240 bps, chronologically. Steady improvements over time will win the game for PG. The efforts have yielded respectable figures. From 2013 to 2016, the core gross margin improved by 3.9% (constant currency) and the core operating margin improved 5.2% (constant currency).
With Peltz using PG stock positions to bend management’s ear, investors can expect the company to continue squeezing inefficiencies out of their system, resulting in further margin improvements. Given the size of Procter & Gamble, the improvements will be incremental rather than huge leaps and bounds year-over-year, but the cumulative effect on the organization will be dramatic.
A simpler company is not only more efficient but also more easily understood by the market. Complicated structures — like John Malone’s cable empire with multiple tracking companies — often trade at a discount to perceived intrinsic value because of their complexity. If investors have trouble analyzing the company, attaining full valuation is filled with hurdles.
Creating Shareholder Value in PG Stock
Management’s Deutsche conference presentation barely moved the needle on PG stock in the days following the gathering. Still, flipping through the slides, it seems PG really is delivering on its claim.
There is also a renewed focus on growth opportunities for the brands that survive the culling — the global diaper market as well as fabric softener.
It may or may not be the Peltz effect, but it’s worth noting that last month’s presentation kept coming back to the theme “P&G – Creating Shareholder Value,” not-so-subtly reminding investors of what occupies the work day in the soap-maker’s executive suite.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.