Procter & Gamble Co (NYSE:PG) has been the source of much drama lately. Of course, the company engaged in a brutal proxy fight with Trian Partners’ Nelson Peltz — and barely won.
Yet this was not the only example of shareholder activism. Back in 2012, Pershing Square’s Bill Ackman also fought for changes at the company. But he eventually sold off his 2% stake.
No doubt, the big issue has been the lagging PG stock price. For the year so far, the return is a mere 5.7%. This is despite a big-time bull market for large caps.
Yet the poor performance for PG stock is not a recent thing. During the past 5 years, the shares have gained a mere 32%. By comparison, the S&P 500 was up about 87% for this period of time.
Now it’s true that PG has been engaged in turn-around efforts, with a big focus on cost-cutting and streamlining the operations. But is the strategy enough? I don’t think so. If anything, I believe PG stock is likely to remain lackluster for some time.
So let’s see why.
PG Stock Issue No. 1: Secular Headwinds
The consumer products market is undergoing upheaval. Consumers have much more power, as seen with the use of social media tools like Facebook Inc (NASDAQ:FB) and Twitter Inc (NYSE:TWTR). They allow for spreading word-of-mouth at lightning speed.
But consumers also want brands that are personalized and have unique stories. This is especially the case with younger generations, such as the Millennials. For the most part, if they do not have compelling reasons to buy a product, they are likely to just buy the cheaper alternative.
In the meantime, the impact of e-commerce continues to challenge consumer products companies. Companies like Amazon.com, Inc. (NASDAQ:AMZN) have access to enormous amounts of data, which allows for developing private labels. A prime example is AmazonBasics batteries. These companies can act as digital toll booths — that is, charging consumer products companies higher rates to reach customers.
As for PG, the company has yet to provide a clear-cut strategy for how to deal with the new world. In light of this, it should be no surprise that the company has continued to struggle.
PG Stock Issue No. 2: Innovation Problems
One of the main arguments from Peltz is that PG has lacked an innovative culture. According to his investor presentation: “P&G has not created a meaningful new brand since Swiffer, almost 20 years ago.”
While this is a bit of an exaggeration, there is still lots of truth to the statement. The innovations for PG have been primarily about making tweaks to its franchise products.
In fact, it seems that PG has been mostly focused on financial engineering instead. This has meant the unloading of many smaller brands. And yes, there have been plenty of buybacks of PG stock, coming to about 20%. But such actions really do not address ginning up innovation.
PG Stock Issue No. 3: Valuation and Growth
PG stock is not cheap. Consider that the forward price-to-earnings ratio is 20X, which compares to the overall market multiple of 19X.
Granted, Trian’s $3 billion stake in PG stock is encouraging. And even though the firm lost its proxy battle, there will likely be ongoing agitation to get things back on track.
Yet the problem is that the growth rate has been worsening lately, with a mere 1% increase in the latest quarter. In other words, it will probably take time for the turnaround to get results. And unfortunately, as seen with the tough proxy battle, senior management does not appear ready to make bold changes.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
