Procter & Gamble - Washburn University

1 Student Investment Fund Stock Report Analysts: Janel Logan, Amanda Repp and Padma Venkatraman Business Summary Procter & Gamble , founded in 1837 and based in Cincinnati, OH, is recognized as the world's largest producer and distributor of household and personal products. PG is organized into three global business units: Beauty; Health and Well Being; and Household Care. PG Procter and Gamble operates in over 80 countries and offers products and services to more than 180 countries worldwide. PG has a strong global market presence. In 2009, PG generated 61% of its total sales in international markets. Procter & Gamble NYSE: PG Highlights PG is focused on developing its consumer understanding, marketing, and brand building techniques. PG manages 23 brands that individually generate over $1 billion in annual sales and 20 brands that individually generate half of a billion in annual sales.

2 12 of PG s billion dollar brands are currently the #1 global market share leader in their respective product categories. Investment Thesis Concerns over a sluggish economy in 2010 led us to PG we favor large capitalization, low beta, defensive stocks that pay above average dividends and have strong growth potential in foreign markets. PG is the best consumer staples stock in terms of brand management, innovation and consumer understanding. Procter and Gamble has superior financial standing and has provided shareholders with substantial value creation over time. Price Performance Recommendation: Long Term Buy Recent Price (12/04/09): $ Sector: Consumer Staples Target Price: $ Sub Sector: Consumer Goods 52 Week Range: $ $ Stock Classification: Classic Growth Market Capt: $178 B Institutional Ownership: 58% P/E Ratio: Dividend Yield: Earnings per Share: $ Beta: Student Investment Fund: Procter & Gamble Business Segments PG is organized into three global business units: Beauty, Health and Well Being, and Household Care.

3 BEAUTY Includes two sub segments: o Beauty (2009 Sales $ B, of sales revenue) cosmetics, deodorants, hair care, personal cleansing, prestige, fragrances and skin care products Billion dollar brands include: Head & Shoulders, Olay, Pantene and Wella o Grooming (2009 Sales $ B, of sales revenue) blades and razors, electric hair removal devices, facial products, shave products and home appliances Billion dollar brands include: Braun, Fusion, Gillette and Mach 3 HEALTH AND WELL BEING Includes two sub segments: o Health Care (2009 Sales $ B, of sales revenue) feminine care, oral care and personal health care products Billion dollar brands include: Actonel, Always, Crest and Oral B o Snacks and Pet Care (2009 Sales $ B, of sales revenue) pet food and snacks Billon dollar brands include: Iams and Pringles HOUSEHOLD CARE Includes two sub segments: o Fabric Care and Home Care (2009 Sales $ B, of sales revenue) air care, batteries, dish care, fabric care and surface care Billion dollar brands include: Ariel, Dawn, Downy, Duracell, Gain and Tide o Baby Care and Family Care (2009 Sales $ B, of sales revenue) baby wipes, bath tissues, diapers, facial tissues and paper towels Billion dollar brands include: Bounty, Charmin and Pampers Student Investment Fund: Procter & Gamble Business Divestures Procter and Gamble has recently divested two of its business segments in order to refocus on its core business segments and to continue to maintain its strong portfolio of brands.

4 Folgers: On June 4, 2008, PG sold its Folgers coffee unit to Smucker Company in an all stock deal worth approximately $ billion. Pharmaceuticals: In 2006, the company began winding down its discover phase pharmaceutical products in favor of licensing late stage compounds, and announced in 2008 it would exit the drug industry entirely. In 2009, PG sold its pharmaceutical unit to Warner Chilcott in a $ billion cash deal. As a result of the divesture, Procter and Gamble expects to book a 43 cent per share earnings boost in the second quarter of fiscal year 2010. These divestures will allow PG to primarily focus on its personal care, beauty, and household product divisions. Moreover, it is our assessment that these divestures reveal Procter and Gamble s strong focus on maintaining a solid portfolio of brands that add value for the company rather than growing for growth's sake.

5 Consistency in Top Management Procter and Gamble recently named Robert McDonald as president and CEO, succeeding Lafley, effective as of July 2009. The new CEO Robert McDonald, otherwise known as Bob McDonald, comes into the position with a rich company background. McDonald previously served as Vice Chair of PG s Global Business Units and Operations. Furthermore, McDonald has vast experience in brand building and market development, and has over 30 years of experience with Procter and Gamble . The news of Bob McDonald being named CEO of the company, shortly followed the announcement of PG s CFO Clayt Daley s retirement. Daley was replaced January 1, 2009 by Jon Moeller. Prior to accepting the new CFO position, Moeller previously served as the Vice President and Treasurer of Procter and Gamble . Moeller also served as Vice President of Finance and Accounting in various global business units within the company.

6 Similar to McDonald, Moeller has developed a rich history at Procter and Gamble . Looking forward, Procter and Gamble can remain confident in their recent changes in top management. Both executive successors are individuals who have a thorough and well developed understanding of the company s core businesses and international markets, gained through many years of experience with Procter and Gamble . Student Investment Fund: Procter & Gamble Competitors Procter and Gamble provides largest and broadest portfolio of products in the household and personal care industry with 24 billion dollar brands. PG generates 43% more revenue than its closest competitor, Unilever (UL). PG also maintains a relatively high operating margin of in 2009, the highest amongst its competitors. Moreover, the company invests more than $2 billion annually in Research and Development nearly twice that of Unilever, and equal to the combined total of its other major competitors Avon, Clorox Company (CLX), Colgate Palmolive Company (CL), Energizer Holdings (ENR), Henkel, Kimberly Clark (KMB), L'Oreal, and Reckitt Benckiser.

7 REVENUE (IN MILLIONS) NET INCOME (IN MILLIONS) OPERATING MARGIN DIVIDEND YIELD BILLION DOLLAR BRAND(S) Procter & Gamble $79,029 $11,010 PAMPERS, PANTENE, CREST, TIDE, BOUNTY, DURACELL, CHARMIN UNILEVER $56,546 $7,015 N/A DOVE, AXE, LIPTON,VASELINE, SLIM FAST, BEN & JERRY S CLOROX COMPANY $5,440 $566 CLOROX BLEACH, PINE SOL, GLAD, BRITA WATER FILTERS, BURT S BEES KIMBERLY CLARK $18,730 $,1810 HUGGIES, KLEENEX, SCOTT PAPER TOWELS COLGATE PALMOLIVE $1,4910 $2,310 COLGATE TOOTHPASTE,PALMOLIVE DISHWASHING LIQUID, SOFTSOAP, SPEEDSTICK Student Investment Fund: Procter & Gamble Global Presence Procter and Gamble operates in over 80 countries and offers products and services in more than 180 countries worldwide. Sales are divided into four main segments: North America accounted for 44% of total sales in 2009 or $ billion.

8 Western Europe accounted for 22% of total sales in 2009 or $ billion. North East Asia accounted for 4% of total sales in 2009 or $ billion. Developing Markets accounted for 30% of total sales in 2009 or $ billion. Student Investment Fund: Procter & Gamble Where to Play: 1) Grow leading, global brands and core categories2) Build business with underserved and unserved consumers3) Continue to grow and develop faster growing, structurally attractive businesses with global leadership potential Currently, international sales (sales outside of North America) generate roughly 61% of Procter and Gamble s total revenue. Over the past five years, the average growth rate for PG s international sales was 12% which is almost three times that of PG s domestic market sales growth of 5%. In recent years, Procter and Gamble has heavily penetrated developing markets.

9 Developing markets include Latin America, Central & Eastern Europe/Middle East and Africa, Greater China and ASEAN/Australasia/India/Korea. Procter and Gamble s sales in developing markets comprise 30% of its total sales revenue up a significant 20% since the beginning of the decade. International Market Share Procter and Gamble maintains a strong focus on its market share, as this is a key factor for success in the Consumer Staples sector in which they compete in. Each firm must compete for market share and viability of growing future sales for the company. As economies around the world continue to recover following the global downturn, Procter and Gamble recognizes that it is pertinent to have an established market share in order to take advantage of new growth opportunities and increase their sales in the future. Developing markets currently make up 86% of the world s population.

10 Procter and Gamble has already established a strong market share in the most crucial areas of these developing markets: Central & Eastern Europe, Middle East & Africa Region, Latin America, Greater China and Developing Asia. It is important that PG takes advantage of opportunities in these particular markets as these areas provide the largest international growth opportunities. Procter and Gamble has established themselves as the leader in market share in the Blades and Razors markets. They are also first and second in market share in the Shampoos and Diapers markets, respectively. Additionally, they maintain first, second and third market share positions in the Laundry, Feminine Care and Oral Care product markets, respectively. Purposed Inspired Macro Strategy for Growth Procter and Gamble is taking a focused approach towards its growth opportunities. PG looks to grow its leading, global brands and core categories.