How Much Is Procter & Gamble Worth?

Some companies just don't need much of an introduction, and Procter & Gamble (NYSE: PG  ) definitely falls into that category. Shoppers the world over know it as the consumer goods giant behind brands such as Zest, Crest, and Mr. Clean. Investors know it as one of those solid companies that stubbornly performs year in and year out.

Shares of P&G currently change hands at a bit more than $59 per share. Is that a good deal? Well, first we need to get an idea of what P&G's shares are really worth.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how similar companies are valued. So let's take a look at how P&G stacks up.

Company

Total Enterprise Value / Trailing Revenue

Price / Trailing Earnings

Price / Forward Earnings

Trailing PEG

Procter & Gamble

2.5

16.8

15.0

1.9

Alberto-Culver (NYSE: ACV  )

1.9

21.3

17.8

1.6

Church & Dwight (NYSE: CHD  )

1.8

15.8

14.7

1.3

Clorox (NYSE: CLX  )

2.1

15.1

13.9

1.5

Colgate-Palmolive (NYSE: CL  )

2.5

17.6

14.9

1.8

Kimberly-Clark (NYSE: KMB  )

1.7

13.7

12.9

1.7

Kraft (NYSE: KFT  )

1.8

16.7

13.9

2.1

Average

2.0

16.7

14.7

1.7

Source: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance. Average excludes Procter & Gamble.

Using each of those averages to back into a stock price for P&G, and then taking the average across those results, we can come up with an estimated price per share of right around $57. This would suggest that P&G may be slightly overvalued.

Valuations based on comparable companies assume that the companies you're comparing are, well, comparable. The results, then, basically tell you whether the company in question is trading at a premium or a discount to the rest of the group. Nothing brain-busting there, right?

In this case, we could easily say that these are all very comparable companies. They're all consumer products companies, and the group is chock-full of quality brands from Noxzema to Clorox and Arm & Hammer. But should it really surprise us that P&G trades at a premium to the group? While these may all be solid companies, we could probably argue that P&G is still a cut above.

Collecting the cash flow
An alternate way to value a stock is to do what's known as a discounted cash flow analysis. Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and it attempts to predict the future, it can be a fickle beast, and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For P&G's DCF, I used the following assumptions:

2010 Unlevered Free Cash Flow

$11.9 billion

FCF Growth 2010-2014

8.8%

FCF Growth 2015-2019

4.4%

Terminal Growth

3%

Market Equity as a Percentage of Total Capitalization

86%

Cost of Equity

12%

Cost of Debt

3.1%

Weighted Average Cost of Capital

10.6%

Source: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, and author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of $60 for P&G's stock. This would suggest that Mr. Market has nailed down a pretty fair price for P&G.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well-advised to play with the numbers further before making a final decision on P&G's stock.

That said, the range of $57 to $60 that we got from the two valuation methods seems to say that P&G's stock is fully valued right now. At the midpoint between the two estimates we get $58.50 -- a hair below P&G's current price.

What does this mean? For current shareholders, there doesn't seem to be any reason to budge -- particularly since the company continues to churn out a growing stream of dividends. For those thinking about buying the stock, it might be worth waiting to see if shares come down a bit. Either that, or accept that your returns may be shy of the 12% bar that I set above.

Do you think P&G's stock is cheaper than my calculations let on? Head down to the comments section and share your thoughts.

Even if you're busy buying blue chips for your portfolio, some well-chosen shorts may be just what your portfolio needs.

Clorox, Kimberly-Clark, and Procter & Gamble are Motley Fool Income Investor choices. The Fool owns shares of and has written covered calls on Procter & Gamble. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookiees were harmed in the making of this article.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2010, at 1:49 PM, talotu wrote:

    "beta -- a measure of how volatile a stock is versus the rest of the market"

    That is NOT what beta is, nor what it was meant to approximate.

    Standard deviation is a much better (though still imperfect) measure of how volatile a stock is, if you want to figure out how volatile a stock is versus the market, you could divide one by the other.

    There is a strong case for using beta in DCF cost of equity, but not because it's an approximation of volatility. Most investors would be better off if they never used beta for anything, because incorrect uses are so common.

    For more information, you should read the paper:

    <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1076742&q...

    Investment Volatility: A Critique of Standard Beta Estimation and a Simple Way Forward

    </a>

  • Report this Comment On September 01, 2010, at 6:40 PM, TMFKopp wrote:

    @talotu

    If you want a precise academic definition of beta, a brief few words in this article are not where you'll find it.

    No matter how you define beta, the calculation looks at the past movements of the stock price, which I tend to think is less than useless.

    I wasn't able to read the paper you point to though b/c the link doesn't work.

    Matt

  • Report this Comment On October 23, 2010, at 12:06 PM, beittelspence wrote:

    The link works. If you had gone to the search page and pasted in the paper's title, you'd have gotten to the abstract. Then you could download the whole paper. Go to this link and click One-Click Download. The paper runs to 16 pages which I did not read. because I do not care that much about this subject.

    And I'm very behind in my reading.

    Don

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