Procter & Gamble Company (PG)

Conclusion

Procter & Gamble is a global maker of branded consumer packaged goods, selling products such as Tide, Pampers, Gillette, Crest and Head & Shoulders across five segments. At a share price of 168.32 USD, the market capitalisation is 390.1 billion USD.

The verdict is overvalued. Today's multiples sit slightly below their own ten-year medians: the price-to-earnings ratio is 24.3 against a median of 25.3, a premium of -3.9%, and EV/EBITDA is 16.9 against 18.6, a premium of -9.1%. The discounted cash flow gives 105.42 USD per share at a discount rate of 8.87%. The fair value band runs from 111.60 to 167.40 USD with a midpoint of 139.50 USD, so the margin of safety is -17.1% at the current price. The fair value from historical multiples is 173.59 USD. The reverse DCF implies growth of 9.0%, against revenue growth of 2.7% a year over five years and free cash flow per share growth of 0.9% a year over the same period.

What holds the case up is the return on capital: ROIC of 21.4% against a WACC of 8.4%, and free cash flow conversion of 95.7% over the last twelve months. The company also beat earnings estimates in all eight of the last quarters. The weakest numbers are the current ratio of 0.72, the five-year revenue growth of 2.7%, and the 9.0% growth the price implies. If growth stays near its delivered pace, the price has little room to be justified.

Financial health

Financial strength is yellow: the Altman Z-score, net debt to EBITDA and interest coverage are assessed good, while the current ratio is assessed bad. The current ratio is 0.72 and the quick ratio 0.49. Net debt to EBITDA is 0.96x, debt to equity is 0.71, and interest coverage is 15.8x. The Altman Z-score is 5.54, in the safe zone, although the model was designed for manufacturers rather than consumer goods companies. Insolvency risk: low, about 0.2% by the estimate of the Ohlson model over one to two years. The balance sheet carries modest debt, and the thin liquidity buffer is the main point to watch.

Earnings quality

Earnings quality is green, supported by strong cash conversion and a shrinking share count, while the Piotroski score is only neutral at 6 of 9. Free cash flow conversion is 95.7% over the last twelve months and 95.8% over five years. The accrual ratio is -2.8%, meaning reported earnings are backed by cash. Stock-based compensation is 0.6% of revenue, and free cash flow after it is 14.84 billion USD. The share count has fallen at a compound rate of 1.4% a year over five years, which points to buybacks. The Beneish M-score is not available. Earnings beat estimates in all eight of the last quarters, by an average of 2.6%. Estimate revisions are negative: the current-year estimate changed by -0.5% over 90 days, with 10 downward and 7 upward revisions in the last 30 days.

Profitability

Profitability is green, with all four profitability measures assessed good. The gross margin is 49.8% against a ten-year median of 50.0%, and the operating margin is 22.6% against 22.1%. The net margin is 18.2% against 18.4%, and operating margin stability is 21.1%. The return on invested capital is 21.4% against a WACC of 8.4%, with the given difference of 13.0 points. The five-year median ROIC is 21.0%. Return on equity is 29.1%. The DuPont split shows a net margin of 18.4%, an asset turnover of 0.69 and an equity multiplier of 2.33, so part of the return comes from leverage. The returns come mainly from margins and capital efficiency rather than debt.

Growth

Growth is yellow, with one measure assessed good and three neutral. Revenue has grown at a compound rate of 2.0% over three years, 2.7% over five years and 2.9% over ten years. Earnings per share grew 3.9% over three years, 3.8% over five years and 6.0% over ten years. Free cash flow per share grew 4.1% over three years, 0.9% over five years and 3.9% over ten years. Revenue rose in 9 of the last 10 comparable years. Analysts expect earnings per share to grow 6.1% next year. The growth is steady rather than fast, and it sits well below the growth the share price implies.

Valuation

Valuation is red: the verdict signal is assessed bad, with the verdict overvalued. The price-to-earnings ratio of 24.3 is a discount of -3.9% to its ten-year median of 25.3, and EV/EBITDA of 16.9 is a discount of -9.1% to 18.6. Price to free cash flow of 25.4 is a premium of 2.7% to a median of 24.8. The DCF gives 105.42 USD per share, using a discount rate of 8.87%, and about 55.0% of its value sits in the terminal value, so it should be read with caution. The fair value band runs from 111.60 to 167.40 USD, with a midpoint of 139.50 USD and a margin of safety of -17.1% at 168.32 USD. The fair value from historical multiples is 173.59 USD. These are estimates built on fixed assumptions, not price targets. The reverse DCF implies growth of 9.0%, against five-year revenue growth of 2.7%. The dividend yield is 2.6%, and the dividend absorbs 67.1% of free cash flow.

Risks

The main risk is valuation: if the company keeps growing revenue at around 2.7% a year, the implied growth of 9.0% will not be delivered and the price has room to fall toward the fair value band. A current ratio of 0.72 leaves little cash cushion for a shock, although the coverage and Altman Z-score point to low near-term distress. Weak estimate revisions could signal slower earnings. Gross margin sits just below its ten-year median, so input cost pressure would reduce profitability. The Beneish M-score is not available, so manipulation risk cannot be checked by that model. This analysis has no debt maturity schedule and no revenue by segment, so refinancing risk and segment performance are not assessed.