P&G – As Predicted by ModelPrice Guy time has run out on Mr. McDonald!
May 23, 2013
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When you know model price math you can make predictions and sit back and wait. Over the last 15 years I usually say to myself, “I saw that!” when one of my notional predictions becomes reality. One of the objectives of this blog is to write and make predictions with a record, just as I have done mentally in the past, so outside readers interested in finance and valuation can follow along and possibly profit along the way – if they choose.
Back on July 16, 2012 I wrote a blog on Procter & Gamble (PG). At the time Bill Ackman purchased just over a 1% ownership stake in P&G and intended to shake-up management that he perceived as under-performing. For fun, I did some number crunching in this blog not only on P&G itself but also comparing P&G with Colgate-Palmolive.
As I have in many past blogs I introduced readers to our key financial concepts like Solvency Curve, Theoretical Earnings (TE) and other financial concepts not taught in any finance class, MBA program nor CFA accreditation. After doing a review of these numbers and graphically illuminating how these numbers over time foretold the true cause of P&G’s lackluster equity performance. I concluded this blog with the following conclusion.
Radical change usually happens from the outside. As you can see from my graphs, especially comparing model price numbers for P&G to Colgate’s, P&G will have to undergo a major cost cutting exercise as well as shrinking their Theoretical Earnings/balance sheet. Obviously, a company the size of P&G is like watching an oil tanker in the middle of the ocean turn around – in other words this will take time. Will Ackman/shareholders give McDonald time? I think not!
Even though I was right on Mr. McDonald the shocking news is P&G’s board brought back Mr. A. G. Lafley out of retirement – P&G’s previous Chairman and CEO.
The same A.G. Lafley who spearheaded the Gillette acquisition that I highlight is responsible for crushing our EPS/Theoretical Earnings ratio back in 2006, the main driver for P&G’s lackluster performance.
As I said in my conclusion above, “Radical change usually happens from the outside.” P&G decided to look inside to cure a problem, lack of equity performance, by bring back the man whose corporate actions contributed or was the root cause of this lack of performance in the first place.
Links to other Procter & Gamble blogs