Bloomsburg Investment Group Equity Analysis The Procter & Gamble Company (PG) Analyst: Gerrick Hardy, Class of 2021 Trevor Luzi, Mackenzie Gross, Class of 2022 Bloomsburg Investment Group Opinion: After our group's thorough analysis, we believe it is in the best interest of the group if our holding in Procter & Gamble (PG) is partially liquidated. Although our group remains bullish about the company, we think taking some profits from PG's recent run-up and allocating funds elsewhere in the sector would be most beneficial. While the company has provided strong organic growth in each of the two previous quarters, a number of headwinds remain in the way which will likely restrict future growth. A stronger U.S. Dollar has essentially offset the organic revenue growth, and the rise in transportation costs and commodity prices has and will likely continue to squeeze the margins of PG. With consumer tastes trending towards less expensive generic , customers may not respond favorably to recent price increases of some of Procter & Gamble’s largest brands. Our sector believes PG is currently trading at a premium that will not be satisfied with future growth. Despite all of this, we are still bullish because of the high dividend yield that the company has increased for 62 consecutive years, wide array of offerings, and brand loyalty and recognition, among other factors. Considering cross-current risks that exist in the macroeconomic environment and the potential of an upcoming recession or economic downturn, Procter & Gamble will continue to provide stable growth and hedge our portfolio.

Corporate Summary: Corporate Details: Name Procter & Gamble Co The Procter & Gamble Company, founded in 1837, is Ticker PG a global manufacturer and distributor of household Domicile United States goods. The company operates in five main segments. Sector Consumer Defensive These segments are Beauty, Grooming, Health Care, Industry Household & Personal Products Fabric & Home Care, and Baby, Femine, and Family Exchange NEW YORK STOCK EXCHANGE, INC. Care. Within these segments, Procter & Gamble own a wide variety of well-known brands worldwide. Last Close 98.44 Some of these include , , , Price 52 Wk High 100.45 , and . Currently, PG’s goods are sold Price 52 Wk Low 70.73 in over 180 countries and territories around the Latest Dividend 0.72 world through department stores, pharmacies, Dividend Yield % TTM 2.91 wholesalers, and other facilities. The company was Beta 5 Yr (Mo­End) 0.38 founded, and is headquartered, in Cincinnati, Ohio, Avg Daily Volume (3 Mo) 10,561,911.88 and employs 92,000 workers. The top executives of Shares Outstanding (mil) 2,501.58 PG are CEO David Taylor and CFO Jon Moeller. Number of Analysts 6

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Source: Morningstar Direct Procter & Gamble Co PG

Corporate Governance: Board of Directors Francis S. Blake Age 69, Blake has been a Director since 2015. He is also a non-Executive Chairman of the Board of Delta Airlines and Director of Macy’s. Angela F. Braly Braly, 57 years-old, has been a director since 2009. Along with this position, she is also a Director of Lowe’s Companies, Inc., Brookfield Asset Management, and ExxonMobil Corporation. Amy L. Chang Chung is 41 years-old and has served as a Director since 2017. Previous, Amy was a Director of Cisco Systems, Inc., Splunk, and Informatica. Kenneth I. Chenault Chenault is also a director, holding the position since 2008. He is also a Director of International Business Machines Corporation and Facebook. Scott D. Cook Since 2000, Cook has been an Independent Director at Procter & Gamble. He is also the Founder and a Director of Intuit Inc. Scott Cook is 66 years-old. Joseph Jimenez Jimenez has been a Director at Procter & Gamble since March 1, 2018, along with being a Director at GM. From 2010-2018, he was the CEO of Novartis AG, a Swiss Pharmaceutical Company. Terry J. Lundgren Terry Lundgren, currently 66, has been an Independent Director at PG since January 8th, 2013. From 2003-2017, he held the title of CEO at Macy’s. W. James Mcnerney, Jr. McNerney has been a PG Director since 2003. From 2005-2015, he was the President, Chairman, and CEO of The Boeing Company. From 1975-1978, he served as a Brand Manager for Procter & Gamble. Nelson Peltz Nelson Peltz (76), a well-known activist investor, became a PG Director on March 1, 2018. Additionally, he is a Director of The Madison Square Garden Company, The Wendy’s Company, and Sysco Corporation. David S. Taylor The Chief Executive of PG, David Taylor, has held the title of Chairman of the Board since July 1st, 2016. He has been a Director of the Board since 2015. Margaret C. Whitman At the age of 62, Whitman has served as a Director for PG since 2011. Outside of Procter & Gamble, she is a Director for Hewlett-Packard Enterprise and Dropbox. Patricia A. Woertz Since 2008, Woertz has been an Independent Director at PG. She also works in the same capacity for The 3M Company. She is currently 65 years-old. Zedillo has been a Director of Procter & Gamble since 2001 and serves the same role for and . He is currently 66 years-old.

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Source: Morningstar Direct Procter & Gamble Co PG

Corporate Governance: Top Management David Taylor, President and Chief Executive Officer Taylor has been with Procter & Gamble since 1980, holding several different positions. Since November 1st, 2015, he has been the President and CEO of the company. David Taylor is additionally the Chairman of the Board for PG. Jon Moeller, Chief Financial Officer and Vice Chairman Since the beginning of the new year in 2009, Jon Moeller has served as PG’s CFO, later adding the title of Vice Chairman on July 1st, 2017. Elsewhere, he is the CFO and CAO of The Wimble Company. Madhusudan Gopalan, Chief Executive Officer of India Market Gopalan began at the company in 1999, working in the sales division in India. He is currently the Managing Director of Gillette India Ltd, as well, starting on July 1st, 2018. Jennifer Davis, President of Global Feminine Care Davis has held her current title since August 2018. Previously, she has held numerous other roles within the Feminine Care division. She has been an employee of the company for nearly 26 years. Thomas Finn, President of Global Personal Health Care Currently 56 years-old, Thomas Finn has been the leader of the Personal Health Care business segment since 2009. Additionally, he’s the Chairman of Supervisory Board at PGT Healthcare, holding that position since November 2011. R. Alexandra Keith, President of Global Hair Care & Beauty Sector Keith is currently 59 years-old, and has been with the PG since October 1st, 1989. Before her current role, she was the President of Global Skin and Personal Care for 3 years from 2014-2017. Julio Nemeth, President of Global Business Services Nemeth has served in this position since January 1st, 2015. Prior to his current role, he was the Vice President of Product Supply and Global Operations from 2013-2014. Markus Strobel, President of Global Skin & Personal care Business Since January 1st, 2017, Strobel has been the President of that particular business segment. Overall, he has been a member of the company for 28 years. George Tsourapas, President of Global Home Care and P&G Professional Tsourapas is 58 years-old and has been with Procter & Gamble since 1986. His first role with the company was as a Production & Buying Assistant in Greece. Gary A. Coombe, President of Global Grooming Prior to his current position, Coombe was the President of Europe Selling & Market Operation at PG from 2014-2018. He has worked for the company for 33 years.

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Source: Morningstar Direct Procter & Gamble Co PG

Corporate Governance: Top Shareholders & Insider Transactions Top Institutional Shareholders: (As of 2/22/19) 1. Vanguard Group Inc. (Position: 194,968,009), (7.79% of outstanding shares). 2. BlackRock Inc. (Position: 168,407,978), (6.73% of outstanding shares). 3. State Street Corp. (Position: 112,142,411), (4.48% of outstanding shares). 4. State Farm Mutual Automobile Insurance Co. (Position: 36,899,695), (1.48% of outstanding shares). 5. Trian Fund Management LP (Position: 36,699,867), (1.47% of outstanding shares).

Top Individual Shareholders: (As of 2/22/19) 1. David Taylor (Position: 221,992), (<0.01% of outstanding shares). 2. Jon Moeller (Position; 169,600), (<0.01% of outstanding shares). 3. Marc Pritchard (Position: 138,902), (<0.01% of outstanding shares). 4. Scott Cook (Position: 111,960), (<0.01% of outstanding shares). 5. Brian Broderick (Position: 88,158), (<0.01% of outstanding shares).

Recent Insider Transactions February 22nd, 2019: Mary Lynn Ferguson-McHugh sold 67,407 shares at a price of $100.17. February 13th-15th, 2019: Nelson Peltz's hedge fund, Trian Partners, sold a combined 1.2 million shares of PG. November 9th, 2018: Deborah Platt Majoras sold 71,372 shares at a price of $91.40. November 13, 2018: Jon R. Moeller sold 228,905 shares at a price of $91.88. November 13, 2018: Valarie L Sheppard sold 40,751 shares at a price of $91.93. January 31, 2019: Jeffrey Schomburger sold 41,088 shares at a price of $95.00.

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Source: Morningstar Direct Procter & Gamble Co PG

Financial Summary, Year End 2018 (in millions) Financial Highlights Market Capitaliza�on 246,255.51 -Q2 Revenue of $17.44 billion, up 50 basis points year-over-year Total Revenue 66,832.00 Gross Profit 32,564.00 -Q2 EPS was $1.25 (beat expectations); increased 5% year-over-year Opera�ng Income 13,711.00 -Organic sales grew 4% in each of previous two fiscal quarters Net Income Cont Ops 9,861.00 Net Income 9,750.00 -In Q2, organic sales in China grew 15%; over the first half of FY 2019, growth has been 9% Current Assets 23,320.00

Cash 11,850.00 -Each of the company's top 15 markets grew in organic revenue Total Assets 118,310.00 Current Liabili�es 28,237.00 -Held or increased market share in 34 of top 50 countries (in terms of sales) Long­term Liabili�es 37,190.00 Total Liabili�es -E-commerce organic sales grew by nearly 30% in Q2 Total Equity 52,293.00 Opera�ng Cash Flow 14,867.00 -Foreign exchange was a $200 million earnings headwind in Q2

Inves�ng Cash Flow ­3,511.00 -In Q2, PG repurchased $750 million in shares and paid $1.9 billion Financing Cash Flow ­14,375.00 in dividends Change In Cash ­3,019.00 -2.91% dividend yield; have increased dividend payouts for 62 EBITDA 16,666.00 consecutive years Enterprise Value 268,711.51 Capital Expenditure ­3,717.00 -Increased FY 2019 high-end organic sales forecast from 3% to 4% P/E Ra�o Forward 20.70 PEG Ra�o 2.96 Dividend Yield % TTM 2.91

Investment Growth

Time Period: 3/1/2016 to 2/28/2019

60.0%

52.5%

45.0%

37.5%

30.0%

22.5%

15.0%

7.5%

0.0%

-7.5% 5/2016 8/2016 11/2016 2/2017 5/2017 8/2017 11/2017 2/2018 5/2018 8/2018 11/2018 2/2019

Procter & Gamble Co 35.3% S&P 500 TR USD 53.2% 3/4/2019 Procter & Gamble Co US Dollar Page 5 of 14

Source: Morningstar Direct Procter & Gamble Co PG

PG Raises Outlook After Quarter of Strong sales Procter & Gamble Announces Acquisition of This Is L In Q2, Procter & Gamble beat on both earnings and Procter & Gamble disclosed, in early february, that they acquired the revenue. The company also raised its full year outlook for company This Is L, although they did not disclose the financial terms of the deal. This Is L’s portfolio primarily consists of tampons, pads, organic sales after increasing by 4% for the second liners and wipes made out of organic cotton. They are a completely straight quarter. The only segment of that recorded a natural company and have already sold more than 240 million decline in organic sales is grooming, as Gillette and other products. Also with each product that This is L sells they donate a PG brands face competition from upstart companies, product to hopefully improve the accessibility of the products to forcing Procter & Gamble to lower prices in order to females in the United States. This complements the brands, and , that Procter and Gamble already own because of their maintain its market share. Price increases contributed 1% shared mission to advocate and serve more girls and women. to the combined organic sales growth in the quarter.

Consumer Goods Companies to Test Reusable Containers PG Acquires Merck's Consumer Health Business

Numerous household goods companies will test selling their products Procter & Gamble has agreed to acquire Merck’s consumer health unit for in resusable containers in an effort to limit their usage of plastic $4.2 billion. This deal will give PG more exposure to the Latin America and materials. This comes as concerns over environmental sustainability has Asia markets which it has previously lacked with its consumer health grown over the years. Overall, 25 companies will begin to sell goods in segment. It will also deepen its product offering, with a wide variety of containers made of steel, glass, and others that will allow consumers to medication, including Merck’s Vitamin Brand. Over-the- return to the company to be refilled. PG will sell 10 brands in this test, counter medication typically provides more stable sales volumes than which include Tide and Oral B. Prices will be roughly the same; however, those that require prescriptions, albeit with smaller margins. In 2018, a deposit must be made per container along with shipping costs. consumer health products made up 12% of the company’s total sales. The Analysts believe this could be a great way for companies to attract eco- completion of the acquisition was announced by Procter & Gamble on friendly customers and build customer loyalty, but have their doubts November 30th, 2018. Around 3,300 Merck employees could possibly due to high costs and customer behavior. move to Procter & Gamble as a part of the acquisition.

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Source: Morningstar Direct Procter & Gamble Co PG

Industry Environment: Procter and Gamble operates in the Consumer Staples sector, which is typically thought of as a haven for investors. This is due to the stability of demand for the products and services that are offered by companies within the industry. An important factor for investors when comparing companies in the consumer staples sector is the dividend payout due to lower growth prospects in regards to share prices. Commond headwinds companies in the sector have been facing are rising commodity prices and transportation costs, which in turn have squeezed margins. Freight costs have surged over the last year, as the demand significantly outnumbers the tight capacity. Additionally, tariffs on imported goods are negatively affecting margins throughout Consumer Staples as expenses rise. Since the beginning of the new year, cash has been leaving the sector as the risk appetite of investors has increased due to equities rebounding after the sharp decline during the fourth quarter of 2018. Because of the stabilization of the market, investors are entering areas of the market that have more growth potential. PG’s main competitors include Johnson & Johnson, Kimberly-Clark, Colgate-Palmolive, and Unilever, among others.

Competitor Comparison Market Gross Net Net Revenue Revenue % Gross Net Cap Current Receivable Profit Income Income % (mil) Chg Margin % Margin % (mil) Ratio Turnover (mil) (mil) Chg (Daily) Procter & Gamble Co 66,832.00 2.73 32,564.00 48.73 9,750.00 -36.38 14.19 246,255.51 0.83 14.40 Colgate-Palmolive Co 15,544.00 0.58 9,231.00 59.39 2,400.00 18.58 15.44 56,870.65 1.14 10.79 Kimberly-Clark Corp 18,486.00 0.75 5,597.00 30.28 1,410.00 -38.10 7.63 39,843.85 0.77 8.69 Johnson & Johnson 81,581.00 6.71 54,490.00 66.79 15,297.00 1,076.69 18.75 368,445.22 1.47 5.91 Unilever NV ADR 64,500.83 1.90 27,820.07 43.13 7,268.43 16.76 11.27 143,257.15 0.73 15.87 S&P 500 TR USD Competitor Comparison (Cont.) Free Total P/E P/B Dividend Cash Asset Debt ROA % ROE % Beta 5 Yr Ratio PEG Ratio Ratio Yield % Flow / Turnover to Total Forward Current TTM Sales % Equity TTM Procter & Gamble Co 0.56 7.95 0.61 17.98 0.38 20.70 2.96 4.64 2.91 17.23 Colgate-Palmolive Co 1.25 19.33 0.78 23.20 3.36 2.55 16.86 Kimberly-Clark Corp 1.25 9.50 824.56 0.58 17.45 3.97 3.46 11.32 Johnson & Johnson 0.53 9.86 0.51 25.51 0.68 16.10 2.93 6.17 2.60 22.71 Unilever NV ADR 0.92 10.37 1.75 40.38 0.60 18.59 3.31 10.61 3.41 15.44 S&P 500 TR USD Investment Growth

Time Period: 3/1/2014 to 2/28/2019

90.0%

80.0%

70.0%

60.0%

50.0%

40.0%

30.0%

20.0%

10.0%

0.0%

-10.0% 8/2014 2/2015 8/2015 2/2016 8/2016 2/2017 8/2017 2/2018 8/2018 2/2019

Procter & Gamble Co 47.3% Colgate-Palmolive Co 17.5% Kimberly-Clark Corp 27.3% Johnson & Johnson 70.0% Unilever NV ADR 60.2% S&P 500 TR USD 66.0% 3/4/2019 Procter & Gamble Co US Dollar Page 7 of 14

Source: Morningstar Direct Procter & Gamble Co PG

Johnson & Johnson (JNJ) Kimberly-Clark (KMB) JNJ was founded in 1886 in New Brunswick, New Jersey, Kimberly-Clark was founded in Neenah, Wisconsin in 1872 where its headquarters are currently located. They and later incorporated in 1928. The company is one of the initially focused on the production of wound care world’s leading producers of tissue, personal care products, products like bandages and sutures, and baby products. and health care products. Some notable KMB-owned Johnson & Johnson is the world’s most well-known brands include Huggie’s, Scott, and Kleenex. Kimberly- producer of health-related goods. Some of their most Clark organizes its products into 3 different segments: well-known products available today are Band-Aids, Personal Care, Consumer Tissue, and K-C Professional. Personal Care offers products such as baby wipes, , Acuvue, and Tylenol. In 2018 third quarter, Johnson & and swim pants. Consumer Tissues offer tissues, paper Johnson made over $20 billion in sales. They are well- towels, toilet paper, and other similar products. The established in 57 countries around the world and they offerings in K-C Professional are similar to those in employ about 130,000 people. The company has three Consumer Tissues, as well as goods such as soaps and separate divisions: consumer healthcare, medical sanitizers. Currently, KMB is headquartered in Irving, Texas devices and diagnostics, and pharmaceuticals. In and employs 41,000 workers. The company has December 2018, a Reuters article showed that Johnson manufacturing facilities in 35 different countries and sells & Johnson knew for decades that the company’s talc products in excess of 175 nations. With its large global powder contained asbestos, a carcinogenic material. A footprint, similar product offerings, and brand recognition, similar occurence for PG would damage its brand trust Kimberly-Clark provides strong competition for Procter & and loyalty, thus hurting its market share and top line Gamble in the marketplace. growth.

Colgate-Palmolive (CL) Unilever (UN) Colgate-Palmolive was founded in 1806 in New Unilever is a transnational provider of consumer products. York City. Currently, the global provider of It is currently co-headquartered in London, and Rotterdam, Netherlands. The company was household goods sells products in over 200 founded in 1921 through a merger. It sells food and countries and territories around the world. CL beverages, as well as cleaning, personal care, and beauty operates within two different product segments: products. Unilever categorizes their products into 4 Oral, Personal, and Home Care and Pet Nutrition. operating segments. These groups are Foods, Brand offerings within the first category include Refreshment, Home Care, and Personal Care. The Food Colgate and SoftSoap. The lone brand in the Pet and Refreshment segments offer brands such as Breyer’s, Ben & Jerry, and Lipton. Brands in the Home Care Nutrition segment is Hill’s. CL is a leading category include Surf and Coral. The Personal Care provider in oral care with a vast number of segment offers some of the more well-known brands products and a large share of the worldwide owned by Unilever. Axe, Dove, and Clear are brands market. The company employs 34,500 workers as offered within that division. Unilever sells its products in of December 31st, 2018. The global footprint of over 190 countries and territories worldwide. It provides Colgate-Palmolive is larger than that of Procter & strong competition to Procter & Gamble internationally, as the international brands are likely more recognizable Gamble. However, Procter & Gamble’s product overseas. Advertising is a strong suit of Unilever, which portfolio is more vast than CL’s and includes could potentially damage PG’s market share in other more recognizable brands to consumers. countries.

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Source: Morningstar Direct Procter & Gamble Co PG

Strengths: Globalization Globalized company with sales of products in more than 180 countries. In Q2, Procter and Gamble grew its market share in 34 of its top 50 countries in terms of sales Brand loyalty and recognition The Procter and Gamble brand and its subsidiaries are well-known throughout the world and customers trust the products are high quality. Customer loyalty helps generate consistent sales as consumers may be emotionally attached to the PG brand Wide array of brands The company owns a vast number of diverse brands that are well-known to consumers globally, including Old Spice, Gillette, and . This gives PG product diversification and a larger share of the market. Strong growth in the last two quarters PG recorded 4% organic revenue growth in each of the previous two quarters. In the final two fiscal quarters of FY 2018, organic sales grew just 1%. The company increased the high-end of its FY organic growth estimate by one percentage point. Operating Income and net income growth The company has improved its profitability since divesting a large number of brands in 2015. Operating income has grown steadily, while net income has increased in two of the last three years. Strong Dividends Procter & Gamble’s high, consistently increasing dividend payouts makes this company extremely attractive to the yield-hungry investors of this sector. For 62 consecutive years, the company has raised its dividend. Industry leading operating margins PG’s margins are amongst the highest in the household goods industry as the company has become more cost efficient in its operations, combined with larger sales growth. Slimmer Product Portfolio After divesting a large number of brands in 2014 and 2015, it has become clear PG is now focusing on its more profitable brands to grow the bottom line. In recent years, resumed growth in Net Income has taken place.

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Source: Morningstar Direct Procter & Gamble Co PG

Weaknesses: Limited product diversity If a significant switch in consumer taste occurs, Procter & Gamble’s core product base could be negatively affected due to its lack of variety Product imitation Because certain of products sold by PG are similar to those sold by generic brands at lower prices, the company loses a portion of customers to competitors. Stagnant net sales growth Although organic growth has shot up the past two quarters, foreign currency fluctuations and high costs of raw materials continue to offset the company’s top line growth. Less pricing power As competition grows from generic brands, PG has less ability to dictate the market’s prices. Consumers are now more inclined to buy products from upstart brands that offer similar goods for far less. In the grooming segment, notably, PG has been lowering prices to increase the demand for their products. Grooming segment Organic sales have dropped in the grooming segment the past two quarters as competition from Harry’s and Dollar Shave Club have hurt sales and caused PG to lower prices in order to maintain market share. Long-term investments Lack of capital set for long-term investments shows a potential lack of vision for long- term revenue growth and profitability. Dependency on physical retail stores Just 8% of PG’s sales come from online, which limits sales growth as a larger percentage of retail purchases are now made on the internet versus several years ago. With a large portion of e-commerce sales made by younger adults, PG could be missing out on sales from a sizeable demographic segment. In 2018, Walmart, the largest customer of PG, accounted for 15% of the company's net sales.

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Source: Morningstar Direct Procter & Gamble Co PG

Opportunities: Merck Acquisition The acquisition of Merck’s consumer health business allows PG to expand its health product portfolio, specifically outside of the United States, where it has lacked presence. This Is L Acquisition In February, PG announced it acquired "This Is L", an international feminine care brand that offers period products. It is considered one of the fastest growing brands in its category in the U.S. Other Merger & Acquisition Activity With an ample amount of cash on hand, the company has the ability to acquire additional brands to further diversify its brand offerings. Dovish Federal Reserve In last month’s FOMC meeting, Chairman Jerome Powell announced the Federal Reserve would be patient in raising interest rates and monitor the effect macroeconomic risks have on economic growth. In December’s meeting, Powell had said two rate hikes were penciled in for 2019. This is a positive development, as higher interest rates cut into dividend yields, making the bond market more attractive for conservative investors. Price increases The company announced in July it would be increasing the prices of major brands, including Pampers and , in order to take advantage of increased consumer spending and offset rising commodity and transportation costs. In Q2 of FY 2019, it was reported that increased pricing positively affected top line growth by 1%. Business restructure In an attempt to simplify its business, the company has reorganized its operations into six small business units that will have separate leaders. The company hopes this move will streamline its business, improve productivity, and allow for quicker reaction to changes in the market. Possible U.S./China Trade Deal If the two countries are able to come to an agreement and tariffs are lifted, costs of raw materials would be lowered, increasing margins and the bottom line. Also, an alleviation of trade tensions would likely create a spark in the economy of China, which has seen slowed growth as of late. Increased consumer spending could generate sustained organic growth for PG in China, which has been rather volatile in recent years. Additionally, emerging markets would likely benefit and their currencies would appreciate against the USD, helping ease some of PG's headwinds. Market Volatility As was seen in the Q4 sell-off, increased market volatility would likely decrease the risk appetite of investors and generate larger cash inflow into the Consumer Staples sector E-Commerce More and more consumers, especially young adults, are spending online rather than at a traditional brick-and-mortar store. An increase in e-commerce presence would extremely beneficial to top line growth. In Q2, e-commerce organic sales grew nearly 30%. Sustained growth in emerging markets While organic growth in emerging markets, notably China, has been volatile in recent years, performance in those areas has been strong each of the past two quarters. Consistent growth would be extremely beneficial to the top line growth of PG moving forward. Synergies with Microsoft and Google Microsoft and Google are two vendors being used by Procter & Gamble to develop their products using AI technology to gather data analytics from customer usage.

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Source: Morningstar Direct Procter & Gamble Co PG

Threats: Competitors Competition of PG could create a decrease in the company’s market share, hurting sales. This includes big name brands as well as generic brands. Margins squeezed by Amazon As Amazon increases costs for suppliers to offset transportation costs, margins of Procter & Gamble continue to be damaged by the e-commerce company. Additionally, Amazon has limited the amount of low-priced products that consumers can purchase. Currency exchange rate fluctuations Roughly 59% of net sales in FY 2018 came from outside the U.S. The possible appreciation of the USD relative to other currencies would continue to hurt the top line. Foreign currency fluctuations negatively affected Q2 sales revenue by 4%. As for overall earnings in FY 2019, the company estimates that exchange rates will be a $900 million after-tax headwind. Rising input costs Rising costs of raw materials and transportation have hurt the margins of Procter & Gamble. Commodity costs are likely to be a $400 million headwind and trucking costs are up 25% year-over-year. Global growth concerns Slowing global growth, largely in Europe and China, can hurt consumer spending worldwide. As of the end of Fiscal Year 2018, 24% of the company’s sales came from Europe. 18% came from China and the Asia Pacific region. No U.S./China Trade deal If the U.S. and China do not come to a trade agreement, the trade war will continue and likely accelerate the slowdown of the Chinese economy. This, combined with tariffs that would remain would hurt the overall financial performance of PG. No-deal Brexit A potential No-deal Brexit would likely increase prices of products, as the implementation of trade duties would raise the costs of goods. Cash exiting Consumer Staples As equities have rebounded in Q1 of 2019 and volatility has subsided, investors are leaving the defensive sector and taking on more risk in areas with more growth potential. Environmental Sustainability As concerns over the damage caused to the environment has grown over the past several years, companies have faced pressures to decrease the usage of plastic material that leads to harmful waste. In recent years, PG has launched programs in order to become more sustainable and attract new groups of customers. Disruption in brand trust If any of PG’s products were to cause health or safety issues, similar to what happened with Johnson & Johnson, consumer trust in the company’s image would be severely damaged. Along with that, high litigation costs are possible, which would hurt profitability.

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Source: Morningstar Direct Procter & Gamble Co PG

Valuation: Discount Cash Flow Model (DCF) Using WACC, our group came to a fair value of $134.47. We used WACC because of the company’s low debt-to-equity ratio, meaning it finances its operations more through equity than it does debt. In regards to the inputs, we calculated total revenue, operating income, interest expense, and dividends per share. Our group believes this is an overvaluation of Procter & Gamble, largely due to estimates of total revenue over the next five years that we believe are doubtful of coming to fruition. Additionally, changes in net working capital saw a spike in 2017 that generated a spike in the six- year average and the DCF valuation as a whole. The same is true with issuance of common stock, which has went down greatly over the past four years. However, the high totals in 2013 and 2014 skewed the average, which also helped result in the higher valuation.

Valuation: Discount Dividend Model (DDM) For the DDM model, we came to a valuation of PG at $91.14, which we believe is a fair value of the company. With a 3.2% dividend yield, Procter & Gamble boasts one of the highest dividend yields throughout the sector. The company makes it a priority to return value to its shareholders. For 62 consecutive years, PG has raised its dividend payments and we, as a group, have no reason to believe this streak will stop anytime soon. Procter & Gamble has a dividend payout ratio of 64.9%, higher than the industry average of 54.43%, meaning PG is spending a greater percentage of its net income on dividends. In April 2018, the company raised its dividend per share total from $0.69 to $0.717.

Valuation: Multiple Valuation For the first multiple valuation, we calculated the average of the last 10 years of Procter & Gamble’s historical P/E ratio and then multiplied that figure by the average of EPS estimates over the next 5 years. Using this multiple, we came to a value of $94.40, which our group believes is a very slight overvaluation of PG because of the large increase in the company’s P/E ratio during 2018. We agree with the future EPS estimates, as the company has slowly been increasing its bottom line through brand divestitures and cost-savings.

The second multiple we used was EV/Sales. This measures how expensive it is to purchase PG’s total sales. It is an extension of Price/Sales, but uses enterprise value instead of market capitalization because it includes the total debt of the company. The EV/ Sales of PG is 4.10. When looking at its main competitors, Johnson & Johnson’s is 4.63, Colgate-Palmolive’s is 4.11, and Kimberly- Clark’s is 2.62. The low total shows investors believe the company may be undervalued, which we disagree with. Over recent months, PG’s number has increased, showing investors are more optimistic about the company’s future growth. However, we are more conservative about our forecast due to headwinds and other issues facing the company that were discussed in the report.

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Source: Morningstar Direct Procter & Gamble Co PG

Bloomsburg Investment Group Disclaimer This report was developed by student members of the Bloomsburg Investment Group (BIG). The purpose of the report is to provide research analysis of securi�es to poten�al and exis�ng donors of The BIG Fund. The report is designed to exemplify the abili�es of our members through investment research and analysis. Analysts of the Bloomsburg Investment Group and The BIG Fund are not registered brokers, investment advisors, or licensed financial professionals. The generated opinion of our analysts is not an offer or solicita�on to buy or sell any security, and due diligence is recommended before making any financial transac�on. Informa�on included in this report was compiled from different public sources. Not all relevant data was included into the report, and accuracy is not guaranteed. Students, faculty, and staff of Bloomsburg University may have a financial interest in any company listed in this report.

Sources Cited -Wall Street Journal

-CNBC

-Bloomberg Terminal

-Capital IQ

-Morningstar Direct

-Reuters

-Procter & Gamble 10-K

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Source: Morningstar Direct