Procter & Gamble PG
P&G is a world-class franchise vastly under-earning under a distracted CEO McDonald; restoring 5% growth and 24% EBIT margins lifts EPS to $6 and shares 60% to $125.
Thesis
Pershing Square owns ~29 million shares of Procter & Gamble and argues the world-class consumer franchise is vastly under-earning its intrinsic potential under CEO Bob McDonald. Despite 25 billion-dollar brands, category leadership in grooming, diapers, and hair care, and ~40% of sales from emerging markets, P&G grows organic revenue at only 3% versus 5-7% for Unilever, Colgate, and L'Oreal, and earns an 18.8% EBIT margin versus Colgate's 24%. Pershing blames bloated overhead, an unfinished Gillette integration, convoluted organizational design, and a distracted CEO sitting on 21 outside boards. Fixing cost structure and restoring 5% organic growth would lift EPS from $4 to $6 by FY 2016; at a 20x multiple plus two years of dividends, the stock is worth $125 — a 60% premium and 26% compound annual return. If McDonald cannot execute, the Board should install new leadership.
SCQA
Procter & Gamble is the leading global household and personal-care company, with $84bn revenue, ~$230bn market cap, 25 billion-dollar brands, category leadership in grooming, diapers, and hair care, and ~40% of sales from emerging markets.
Under CEO Bob McDonald, P&G grows organic revenue at only 3% versus 5-7% for peers and earns 18.8% EBIT margin versus Colgate's 24%, owing to bloated overhead, an unfinished Gillette integration, and a CEO on 21 outside boards.
Accelerate cost savings beyond the $10bn plan to hit 24% EBIT margin, fix organizational design and capital allocation, and — if McDonald cannot deliver a sustainable turnaround in two to three quarters — replace him with new leadership.
Reaching 5% organic growth and 24% EBIT margins lifts EPS from ~$4 to ~$6 by FY 2016; applying a 20x multiple plus two years of dividends yields $125/share — a 60% premium and ~26% compound annual return.
The three reasons
- 1
P&G earns $4 EPS today but should earn $6 by FY 2016 at a 24% EBIT margin
- 2
Organic growth of 3% lags every major peer (Unilever 7%, Colgate 6%) despite better category mix
- 3
Stock at $78 is worth $125 in two years — a 60% premium and 26% CAGR
Primary demands
- Hold CEO Bob McDonald accountable for sustained peer underperformance
- Replace the CEO with an internal or external candidate if a sustainable turnaround does not materialize in the next 2-3 quarters
- Raise cost-savings and COGS-productivity targets above the February 2012 $10bn plan
- Drive Core SG&A from 14.4% to ~11% of revenue and gross margin from 49.6% to 51.5% by FY 2016
- Separate the Chairman and CEO roles; improve organizational design, succession planning, and accountability
- Continue aggressive share repurchases
KPIs cited
Pattern membership
Precedents cited
- Gillette 2005 acquisition synergy plan (A.G. Lafley committed to 24% operating margin by end of decade)
- A.G. Lafley 2007 Annual Report commitment to best-in-class gross margins above 52%
- Colgate-Palmolive's 24% EBIT margin at $17bn revenue as operational benchmark
Composition what's on the 45 slides
Slide gallery ·
Notes
Ira Sohn Conference presentation titled 'A Rising Tide is a Good Gamble.' Follow-up, not initial thesis — Pershing Square's PG position became public in July 2012, and this May 2013 deck is a mid-campaign pressure update arguing the turnaround is lagging and setting a 2-3 quarter ultimatum for CEO Bob McDonald. Rhetoric leans analytical but is pointed: slide 33 lists 21 outside organizations McDonald belongs to (~50 days/year), and slides 23 & 28 weaponize former CEO A.G. Lafley's own past statements (52% gross-margin target; 24% EBIT margin post-Gillette) to argue management has walked away from stated goals. Stake disclosed only as ~29 million shares (not as a percent), so stake_disclosed_pct left null per instructions. No sum-of-parts breakup; thesis is operational/margin-expansion with implicit management change and modest multiple rerating. Visually functional PowerPoint, not Ackman's Canadian Pacific tier. Bob McDonald was in fact replaced by Lafley later in May 2013 — campaign effectively won on the accountability front.