UBS Calls Procter & Gamble 'Under-Owned,' Upgrades To Buy

UBS said Procter & Gamble Co (NYSE: PG) shares have positive risk/reward as it upgraded the stock to Buy from Neutral.

"PG remains under-owned by active managers, has persistently lagged key benchmarks, and trades at an attractive discount to peers—even as organic growth seems likely to have bottomed and still-relatively-new CEO David Taylor prepares his first full-year guide," analyst Stephen Powers wrote in a note.

The analyst said, over the past six months, PG has been "progressively signaling a willingness to reinvest, positioning market-share-neutral (or better) growth as a defining measure of success, and acknowledging a need to improve agility while establishing an accountability culture."

Powers, who raised the price target to $96 from $85, said the market seems skeptical that success will come at all, which "we see as overly pessimistic."

The analyst expects PG to guide FY17 to about $3.85-$3.95 in EPS on +LSD/MSD organic growth, with buyside expectations likely similarly positioned. Street expects earnings of $3.97.

"Though we therefore do not expect FY17 guidance to itself trigger outsized stock movement, we see positive prospects to the extent that investors feel a need to "chase" PG following guidance that (a) appears fully achievable/beatable from an EPS perspective, and (b) implies a positive inflection in organic growth over coming quarters (assuming its credible)," Powers noted.

The analyst said if PG achieves 1-2 percent organic growth over the next year, it may not be too material.

"But if it achieves +3% in any of the next 4 quarters, it could well become a name that investors have to again own as the valuation discount versus peers narrows (re-rating from 20x FY18E EPS to 22x)," Powers added.

That said, Powers noted that "if PG's fundamentals don't turn soon, long-term viability deserves scrutiny."