However, despite the run-up in the stock price over the last year, Ackman has maintained his position in the company. The stock is less appealing than it was when it traded in the low-$60s per share, but it may still trade below intrinsic value.
Pricing power
Like many companies that own well-known brands, The Procter & Gamble Company (NYSE:PG) benefits from tremendous pricing power. Its brands are usually the best-known in their respective categories — Charmin, Gillette, and Pampers, to name a few. 25 of its brands gross over one billion dollars annually — more billion-dollar brands than any other company in the world.
The Procter & Gamble Company (NYSE:PG)’s brand recognition enables it to lead or dominate many of the markets in which it competes. Market leadership makes it imperative for retailers to carry the company’s products and give them prime shelf placement, making it more difficult for competitors to sell their products. This allows Procter & Gamble to earn ample and predictable free cash flow.
The chart below is illustrative of The Procter & Gamble Company (NYSE:PG)’s pricing power. Over the years, the company has earned high and relatively stable free cash flow margins similar to that of Colgate-Palmolive Company (NYSE:CL) and higher than that of Unilever plc (ADR) (NYSE:UL).
Colgate-Palmolive Company (NYSE:CL) and Unilever plc (ADR) (NYSE:UL) are just about the only companies that come close to matching Procter & Gamble’s consumer products brand portfolio. Despite being a much smaller company based on overall sales, Colgate-Palmolive Company (NYSE:CL) completely dominates its product markets; the company’s Colgate brand represents nearly half of all toothpaste sales, far outpacing The Procter & Gamble Company (NYSE:PG)’s Crest toothpaste brand.
Unilever plc (ADR) (NYSE:UL), on the other hand, earns lower free cash flow margins than the other two companies because its packaged food segment earns lower margins than its consumer products division. However, the scale of the company’s international distribution network, combined with strong brands (including Hellmann’s mayonnaise and Lipton teas), enable it to earn consistent margins year after year.
The key about each of these companies is that they earn stable free cash flow margins. Except in exceptional years, the companies’ free cash flow margins oscillate between one to two percentage points of the long-term average. This indicates that each company has a high degree of control over its margins, suggesting a high degree of pricing power.
Investment case
Since each firm earns a consistent free cash flow margin, we can calculate no-growth free cash flow by applying each firm’s 10-year average free cash flow margin to trailing twelve months sales. Doing so gives us no-growth yields between 4% to 5% for all three companies.
However, each company will likely grow at least as quickly as the United States economy — and probably a little faster due to operations in emerging markets. As a result, a long-term growth rate of 2% to 3% is a reasonable estimate for these wide-moat companies.
Therefore, investors who buy The Procter & Gamble Company (NYSE:PG), Colgate-Palmolive Company (NYSE:CL), and Unilever plc (ADR) (NYSE:UL) at current prices will likely receive a 6% to 8% compound annual return on investment over a five-year holding period. Not bad for entrenched companies in an overheated market.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends The Procter & Gamble Company (NYSE:PG).
The article Procrastinators Can Still Join the Party in This Stock originally appeared on Fool.com.
Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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