This Just In: Upgrades and Downgrades – Abbott Laboratories (ABT), Emerson Electric Co. (EMR)

Procter & Gamble or Colgate-Palmolive? (Do we really have to choose?)
Last and least, we come to a pair of well-known consumer brands — that one analyst has decidedly mixed feelings about. Canaccord Genuity likes Procter & Gamble a lot. In a research report published Thursday, Canaccord called Procter’s plan to cut $10 billion from its annual budget the “most significant transformation the company has ever attempted” — and worthy of a buy rating. The analyst also praises Procter’s “strong portfolio of brands,” “good track record on cash generation,” and its position as the “largest household and personal care products company by sales” anywhere in the emerging markets.

Unfortunately, this analysis just doesn’t hold up to examination. Sure, on one hand, I agree with Canaccord that PG is a better bargain than Colgate-Palmolive (which the analyst initiated at “sell,” citing a too-high valuation last week). At 21 times earnings, Colgate simply costs too much for its single-digit growth rate to justify.

On the other hand, though, while I prefer Procter & Gamble in comparison to Colgate, that doesn’t mean I’d buy Procter on its own merits. Strong as its brand portfolio and market share may be, the company’s record on turning market heft into cold hard cash is far from enviable. At last report, Procter was still generating only about $0.83 in real free cash flow for every $1 it reported as GAAP “profit.” Procter’s also lugging around a good $26 billion or more in debt, net of cash.

Foolish takeaway
Factor these two numbers into your valuation, and you’ll soon realize that at an enterprise value-to-free cash flow ratio of more than 22, Procter & Gamble is actually just as overpriced as Colgate. Granted, Procter pays a slightly better dividend yield than its rival — 2.9% versus Colgate’s 2.3%. But honestly — 0.6 percentage points worth of dividend yield hardly seems a big enough difference to justify Canaccord’s rating one stock a buy, and the other a sell.

If you ask me, neither one of ’em is worth owning.

The article This Just In: Upgrades and Downgrades originally appeared on Fool.com and is written by Rich Smith.

Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 339 out of more than 180,000 members. The Motley Fool recommends Emerson Electric and Procter & Gamble.

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