In our view, Procter & Gamble is now showcasing the fruits of its multiyear effort to rationalize its brand mix (culling around 100 brands, leaving it with 65) and hone investments on its highest-return opportunities, chalking up five consecutive quarters of robust organic sales gains (ranging from 4%-7%). Despite slimming down, we still think P&G carries clout with retailers, supporting its scale edge. The 65 brands in its mix include 21 that generate $1 billion-$10 billion in annual sales and another 11 that account for $500 million-$1 billion in annual sales. With vast resources to invest in its brands and a mix that spans multiple categories, we think trusted manufacturers like P&G are critical to both brick-and-mortar and e-commerce retailers.
While growth has been fairly broad-based, in line with results over the better part of the last four years, grooming (nearly 10% of sales) continues to be plagued by competitive angst (particularly on its home turf). However, we surmise P&G is pursuing a sound strategic path to rebut competitive pressures in this segment by recalibrating its pricing, investing in on-trend new products (such as its recently released razor geared toward men with sensitive skin, which the firm claims afflicts 70% of males), and launching its own subscription-based sales model. We don't believe opportunities to win with consumers are limited to new products. As an example, Gary Coombe (president of global grooming) has said P&G isn't satisfied with the packaging and believes investments in this realm could also help stabilize its competitive position.
Even with an increased emphasis on reigniting its top-line trajectory, we don't surmise P&G has abandoned its pursuit of efficiency gains, aiming to extract $10 billion of costs from its operations (centered on reducing overhead, lowering material costs, and increasing manufacturing and marketing productivity). However, we don't posit it's out to juice profits but to fuel added brand spend. As such, we forecast P&G to direct 3% and 11% of sales to research and development and marketing, respectively, up from historical levels of less than 3% and 10% in fiscal 2019.
We assign Procter & Gamble a wide economic moat resulting from its intangible assets and cost edge. Given its position as a leading household and personal-care manufacturer (with more than 25% share of baby care, north of 60% of blades and razors, over 25% of feminine protection, and greater than 25% of fabric care), we think P&G is a valued partner for retailers, supporting its brand intangible asset moat source. We believe P&G maintains the resources to bring new products to market (spending nearly 3% of sales or $2 billion on R&D annually) and tout that fare in front of consumers (spending a low-double-digit percentage of sales or about $7 billion annually on marketing) to drive customer traffic into stores and onto e-commerce platforms, which we believe enhances the stickiness of its retailer relationships. In our view, trusted manufacturers like P&G, which operate with a product set that spans the grocery store, are critical to retailers that are reluctant to risk costly out-of-stocks with unproven suppliers. Despite the bargaining power garnered by a consolidating base of retailers, leading brands--like those in P&G's portfolio--still drive store traffic, supporting our contention surrounding the advantage resulting from the firm's brand intangible asset. Bolstering its competitive position is the size and scale P&G has amassed over many years, which enables the firm to realize a lower unit cost than its smaller peers, resulting in a cost advantage.
Beginning in 2014, P&G divulged its intentions to shed about 100 brands--more than half of its brand portfolio at the time, which in aggregate posted a 3% sales decline and a 16% profit reduction the prior three years--which we viewed as an indication that the firm was looking to become a more nimble and responsive player in the global consumer product arena. Even a slimmed-down version of the leading global household and personal-care firm still carries significant clout with retailers, and we think these actions support P&G's brand intangible asset and its cost advantage. The 65 brands that remain in its mix had already accounted for more than 85% of the firm's top line and 95% of its profits. As such, we didn't anticipate P&G would sacrifice its scale edge but would be able to better focus its resources (both personnel and financial) on its highest-return opportunities.
One area where the success of this focus has been evident is in its feminine-care (and more specifically, adult incontinence) business, where it maintains more than 25% value share and has chalked up 15 consecutive quarters of growth (averaging around 3%). As a part of this attention, P&G has sought to break down the stigma associated with adult incontinence products (a market it re-entered in July 2014) by bringing to market new offerings that appeal to female consumers under its Always brand, most recently with the launch of Always Discreet Boutique, which more closely resembles real underwear compared with other products on the shelf. According to the firm, this particular product drove a 50% acceleration in category growth after its launch and increased the firm's household penetration by 15 points. Despite selling at a 60% premium to base underwear offerings in this category, Always Discreet now boasts a dollar share north of 13%, up from around 10% before the launch of Boutique.
We think this supports our contention that management understands the need to consistently bring superiority to market (as it pertains to how a product performs, the packaging, its brand messaging, execution in store and online, as well as the value a product offers for both its retail partners and the end consumer). However, we don't believe the firm is content to stop with some of its recent gains. Much discussion centered on the necessity of being more agile, starting small with product launches and tailoring offerings based on consumer response before rolling out on a larger scale, which we view as a favorable shift. Further, we were encouraged that P&G seems to appreciate the need to be present and innovate across all price tiers (affording the opportunity to trade consumers up and down within its brand set) to withstand intense competitive pressures, as the inability to do so has plagued its business in the past.
Returns on invested capital (including goodwill) have averaged more than 11% annually over the past 10 years, exceeding our 7% cost of capital estimate, and we think the firm can continue to outearn its cost of capital over the next 20 years, supporting our take that P&G maintains a wide moat.
After reviewing P&G's solid start to fiscal 2020 and assessing our assumptions, we're edging up our fair value estimate to $106, from $103, primarily due to the time value of money. However, our long-term outlook (3%-4% annual sales growth and more than 24% operating margins by fiscal 2029, up from an average of 21.6% over the past three years) remains in place. Our revised valuation implies fiscal 2020 price/adjusted earnings of 22 times and an enterprise value/adjusted EBITDA of 16 times.
The sustained acceleration in P&G's top line throughout fiscal 2019 and into 2020 is a testament to the merits of its strategic agenda to rightsize its brand mix and drive productivity savings to fuel further investments behind consumer-valued innovation. Despite this, we don't expect competitive angst and challenging macroeconomic conditions to subside. Globally, P&G's categories grow roughly 2%-3% annually, so to reach the sales growth pace we model (with nearly two thirds of its annual growth resulting from increased volume and the remainder from higher prices and improved mix), the firm would have to grow 1%-2% faster than the markets and categories in which it competes. We view this as achievable, especially in light of recent strategic efforts. For one, the firm has growth opportunities for its leading developed-market brands in many overseas markets (as it expands into the premium product tier to a grateer extent). And despite more tepid growth in several emerging regions, which account for around one third of annual sales, we still believe populations will grow exponentially, urbanization and private investment will create favorable disposable income tailwinds, and a younger consumer base offers the potential for a lifetime of transactions ahead. We forecast low-single-digit growth in the firm's developed-market regions and mid- to high-single-digit growth in its emerging markets.
With complexity removed from its operations (after shedding more than 100 brands from its mix since 2014), P&G now targets extracting another $10 billion of costs by reducing overhead, lowering material costs from product design and formulation efficiencies, and increasing manufacturing and marketing productivity. Beyond boosting profits, we think these savings will fuel product innovation (including improved packaging) and advertising as well as increased sampling to prompt trial long term. We forecast P&G will allocate 3% of sales for R&D and 11% of sales for marketing each year.
Throughout the consumer product sector, much angst has surrounded the competitive landscape and the ability of firms to offset higher commodity and transportation costs with higher prices. Compounding these challenges, promotional spending the past few years has conditioned some consumers to expect lower prices, and lackluster innovation has, in some instances, failed to prompt consumers to pay up for its new higher-priced products. Further, with nearly 60% of its sales derived outside the U.S., P&G is exposed to changes in foreign exchange rates, which could constrain its reported financials, with a more pronounced profit impact, as the firm isn't always manufacturing in the locations where its selling, a challenge that is unlikely to ever fully abate.
But we think past problems ran deeper than external headwinds, as we surmise the firm overextended itself to build out its product mix and geographic footprint. However, management has more recently responded with another $10 billion cost-saving effort to reduce head count and overhead, improve manufacturing efficiency, and free up funds to reinvest in its business.
Although much attention has centered on P&G's inability to drive sustainable sales gains in the past, particularly in its grooming arm, we see similarities to the challenges that previously plagued its beauty business. In the latter case, beauty had succumbed to intense competitive pressures from established branded operators and niche local players at a time when its innovation failed to align with consumer trends. However, management took prompt actions to course-correct, opting to part ways with unprofitable products and launch fare centered on its core anti-aging messaging. And we posit P&G is also taking a sound strategic path to rebut the pressures in its grooming business resulting from lower-price upstarts--by recalibrating its pricing, investing in on-trend new products, and launching its own subscription-based sales model.
Its been nearly two years now since P&G opted to add activist investor Nelson Peltz--who had amassed an ownership stake of more than $3 billion, or around 1% of shares outstanding--to the board, ending a months long saga. While we've long attested that P&G has been pursuing a prudent strategic course centered on rationalizing its product mix, reinvesting behind its brands, removing excess costs, and returning cash to shareholders, we thought the firm's decision to put an end to this ordeal favorable.
Throughout the course of his campaign, Peltz had suggested P&G's organizational structure, corporate governance, and recent financial performance has lagged peers and that more must be done to accelerate the pace of change at the leading household and personal-care firm. While we never expected an immediate shift in the firm's strategic direction following his appointment, we think his oversight could work to ensure the firm remains on target with its current aims.
Since 2015, David Taylor--a nearly 40-year company veteran, who most recently headed up the healthcare business since 2013 and brought beauty care and grooming into his fold--has held the reins. Taylor struck us as the heir apparent, given his grasp of P&G's vast product and geographic footprint. In line with our expectations, this change in the management suite has not resulted in a shift in the firm's capital-allocation priorities nor our Standard stewardship rating. Taylor has continued implementing the playbook P&G has been operating under the past few years--maintaining a stringent eye on extracting costs from its operations, while directing additional resources to invest in product innovation that resonates with consumers and marketing that fare. Beyond articulating and implementing the firm's strategic efforts, we think the onus will be on Taylor to ensure P&G's large global employee base remains engaged in its strategic direction (unlike a few years ago).
In this context, among his grievances, Peltz had taken aim at P&G's insular culture. While we think bureaucracy impaired the company's ability to more adeptly respond to competitive headwinds and evolving consumer trends in the past, we've been encouraged by Taylor's goal of enhancing accountability across the organization. The impediments that plagued P&G during former CEO Bob McDonald's tenure seem fresh in Taylor's mind, and we think he will avoid succumbing to the same pitfalls of overemphasizing operational improvement at the expense of value-added innovation. Taylor strikes us as committed to better aligning the firm's resources and decision-making closer to the consumer, which we view as wise.
In this vein, the firm announced late last year intentions to shake up its organizational structure by focusing on six sector business units that now have direct control over strategy, product and package innovation, and supply chain in its largest markets, including North America, China, Japan, as well as developed European markets, which in aggregate make up about 80% of sales and 90% of aftertax profit. The remaining regions subsequently fall under the purview of CFO Jon Moeller, who added the title of COO in July 2019. This shift aligns with CEO David Taylor's goal since taking the helm to enhance accountability across the organization and better align the firm's resources and decision-making closer to the consumer, which we view as wise. While we think this structure will help P&G to be more responsive and agile, we don't expect it to jeopardize the company's ability to harness the benefits of its scale and negotiating leverage.
Beyond his prior critique of its corporate governance, we don't view as prudent Peltz's previous directive to organize the business into three stand-alone business units: beauty, grooming, and healthcare; fabric and home care; and baby, feminine, and family care. Rather, we think this move could ultimately stand to increase the costs and complexity of the business, unwinding the progress made to date. Further, we surmise this organizational structure would impede P&G's ability to leverage its scale, negotiating leverage, and consumer insights to the extent possible as a combined organization. While we perceive a split of its operations as unwise at this juncture, we think the firm could still look to part ways with other brands, including its consumer tissue business (particularly the Charmin and Bounty brands, which we estimate generate around $4 billion in total sales annually), if efforts to reignite sales cool.
Returns on invested capital (including goodwill) have historically exceeded our cost of capital estimate, and we expect this will remain the case. We are also encouraged by the stock-ownership requirements for senior management, which range from 4 to 8 times base salary, as this tends to align management's interests with those of shareholders.
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