Procter & Gamble's Bull-Case Arguments Are 'Overblown'

Morgan Stanley’s Dara Mohsenian believes that while Procter & Gamble Co (NYSE: PG)'s shares do not appear compelling at present, lower-than-peer organic sales growth would limit multiple expansion going forward.

The analyst maintained an Equal-Weight rating on the company, with a price target of $85.

Breakup Unlikely

Mohsenian believes that the bull case argument that a potential split of the company was a reason to own the stock is overblown.

The analyst stated, “Not only do we believe the probability of a breakup is low, but we also do not see it adding much to shareholder value even if it did occur.”

Related Link: RBC: Procter & Gamble Needs 4–5% Revenue Growth To Justify Its Relative Alpha

Mohsenian went on to explain that a split was unlikely in the near term, given that numerous changes have been made under the new CEO and Procter & Gamble is likely to give some time for these changes to gain traction over the coming 12–24 months.

Slow Sales Growth

The analyst also pointed out that the second bull case for the stock was based on expectations of a potential improvement in organic sales growth.

Mohsenian noted, “PG has made numerous changes that we believe will result in improving sales growth going forward from 0.5 percent in the last four quarters to 2.5 percent in fiscal 2017/18.”

However, the reality is that progress so far on sales growth has been slower and “less impactful” than anticipated, as reflected by the continuing weak scanner data for the United States, European and emerging markets.