In Focus: Activist Investor Bill Ackman Insists He Sees Value In Procter & Gamble
Ackman is known for shaking up companies; there are signs that Procter & Gamble (PG.N) could do with a shakeup. What will happen next?
Hedge fund manager William Ackman, whose Pershing Square Capital Management is famous for its activist stance and shaking up laggard companies, isn’t taking the summer off after declaring victory in his proxy war for de facto control of Canadian Pacific (CP.N). Instead, Ackman has turned his attention from one of the world’s biggest railroad companies to Procter & Gamble (PG.N), the world’s largest consumer products company, whose Tide detergent and Crest toothpaste are household staples. Word came yesterday that the SEC has given Pershing Square the go-ahead to acquire more shares in P&G, and that drove the company’s stock up some 4.4%, although it didn’t manage to hang on to slightly smaller gains today.
But while some investors believe that any Ackman-inspired shakeup can only be good news for Procter & Gamble, the activist manager appears to have taken on a hefty challenge, according to some StarMine metrics. Warren Buffett already is a shareholder, but that doesn’t seem to have done much to make Proctor & Gamble more profitable or generate higher returns for its investors. The company scores only 4 out of a possible 100 on the StarMine Analyst Revisions Model, which predicts future changes in analyst sentiment. Such a low ranking reflects the fact that analysts have been slashing their outlook for the company’s revenues, EBITDA and earnings per share for not only the just-ended second quarter but for 2012 as a whole and into 2013. As you can see in the chart below, 2012 earnings estimates for P&G have fallen from $4.25 per share to $3.81 per share in the course of the 12 months Only a few weeks ago, P&G had warned that the tough economic environment in which it is doing business worldwide would affect its earnings power.
An analysis of Ackman’s move by Reuters Breakingviews points out that since Bob McDonald took the reins at P&G as its new CEO in 2009, the company’s stock has struggled to rise 16%; meanwhile, the S&P has gained more than 40% and rival Colgate is ahead 50%. “Typical activist tactics like a breakup won’t work at the $178 billion Pampers-to-Crest giant,” the Breakingviews article cautions. “New leadership could be one thing to help get P&G back on track, though.”
P&G posts mediocre to low scores on StarMine valuation models, signaling that it’s not likely to appeal that much to investors based solely on value. Still, the StarMine Intrinsic Valuation (IV) model gives it a score of 45, and ascribes an intrinsic value of $77.26 a share to the company’s stock. This places the company right in the middle of the pack in terms of intrinsic valuation, when compared to other companies in the region.
Of course, Ackman has a lot on his plate already. As we discussed on AlphaNow earlier today, Canadian Pacific is struggling with operating efficiencies; the railroad’s high capital spending is putting a dent in its ability to generate earnings growth. Ackman also is behind the efforts to overhaul JC Penney Co. (JCP.N), which reported a first quarter loss that was far larger than expected and suspended payment of its dividends; that’s a high-profile turnaround to which Ackman will need to devote his attention.
Still, Pershing Square’s willingness to acquire a larger stake in Procter & Gamble signals that Ackman probably won’t be content to sit idly by and wait for that company to overhaul itself. And given the negative readings when it comes to earnings forecasts and analysts’ ratings, he may well find support for any proposals from among his fellow investors.
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