The team performed a strategic, financial, and valuation analysis of Procter & Gamble to make an investment recommendation. P&G has a long history and is a global leader in consumer goods with 300 brands. The analysis found strengths in P&G's business model and emerging market growth, but also weaknesses in high competition and commodity costs. Valuation models estimated the stock price could grow moderately assuming the economy improves slowly. The analysis concluded P&G is unlikely to face bankruptcy and would be a fair investment assuming moderate sales growth, recommending investors proceed.

1. Team 2
Javier Azucena
Valere Mokubu
Chintankumar Patel
Jennifer Pradere
Elisa Reyes
Marcello Sobrinho
Financial Reporting and Analysis

2. Objective
• Perform a strategic, accounting, financial,
forecasting, and valuation analysis on Procter
& Gamble
• Make an investment recommendation

3. About P&G
• Founded 1837
• 300 brands in more than 180 countries
• 25 billion-dollar brands
• $83 billion in sales
• $10 billion in net earnings
• Commitment to ongoing innovation
• Global brand – generates 38% of sales and 44% of
unit volume from developing markets

4. Strategic Analysis
Strengths
• Time tested business model - Cost-focused culture
• Brand is associated with tried and true, trusted products
• Strong record of successful developing market growth (>14% in past decade)
• Dominance in emerging markets - Acquisition of Gillette
Weaknesses
• Highly competitive industry – High price and product competition.
• Highly dependent on raw material costs and other commodities
• Highly dependent on sales to Wal-Mart Stores, Inc. and its affiliates (about 14% of P&G’s total revenue in 2012)
Opportunities
• Global trends towards “going green”
• By 2020, 95% of the population growth will be in emerging markets
• Middle class will increase by 1.4 billion – 98% in developing markets
Threats
• Competition from Kimberly Clark, Johnson & Johnson expansion into emerging markets
• Financial instability of international economies and political volatility
• Currency exchange rate and cost fluctuations

5. • Sales are recognized when revenue is realized or realizable and has been
earned
• Goodwill and indefinite-lived brands are not amortized
• The cost of intangible assets with determinable useful lives is amortized on
a straight-line or accelerated basis.
• Financial statements of subsidiaries outside the U.S. are measured using
the local currency.
• U.S. dollar used as the functional currency for subsidiaries in highly
inflationary economies.
• During the 2nd quarter of fiscal 2012 P&G changed the annual goodwill
impairment testing date from July 1 to October 1 of each year.
Accounting Analysis

6. Financial Analysis
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Gross Profit Margin
0
0.05
0.1
0.15
0.2
0.25
ROA
0
20,000
40,000
60,000
80,000
100,000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sales
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Asset Turnover Ratio
0
10000
20000
30000
40000
50000
60000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Gross Profit
0
5000
10000
15000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Net Income

7. Financial Analysis
Quick Ratio
0
0.5
1
1.5
2
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0
1000
2000
3000
4000
5000
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Common Stock
10
15
20
25
Price/Earnings
0
2
4
6
8
10
Mkt. Value of Equity
0
1
2
3
4
Leverage
0.02
0.04
0.06
Dep. & Amortization/Sales

8. • Pessimistic: assuming overall economy does not improve and company experiences sales growth similar to
last year of 1%.
• Optimistic: assuming there is a dramatic improvement in the economy and company experiences sales
growth similar to average growth before the economic crises in 2007 of 16%.
• Expected: assuming overall economy improves at slower pace which will grow P&G sales to 3%.
INCOME STATEMENT Actual Forecast Forecast Forecast Forecast Forecast
Fiscal Year: % 2012 2013 2014 2015 2016 2017
(FYR Ending): (30JUN2012 ) (30JUN2013 ) (30JUN2014 ) (30JUN2015 ) (30JUN2016 ) (30JUN2017 )
Sales (Net) 3% 83,680 86,190 88,776 91,439 94,183 97,008
Cost of Goods Sold 46% 38,881 40,047 41,249 42,486 43,761 45,074
Gross Profit 54% 44,799 46,143 47,527 48,953 50,422 51,934
Selling, General, & Admin Expenses 31% 25,675 26,445 27,239 28,056 28,897 29,764
Operating Income Before Depreciation 23% 19,124 19,698 20,289 20,897 21,524 22,170
Depreciation, Depletion, & Amortiz 4% 3,204 3,300 3,399 3,501 3,606 3,714
Operating Income After Depreciation 19% 15,920 16,398 16,890 17,396 17,918 18,456
Interest Expense 1% 769 792 816 840 866 891
Non-Operating Income/Expense 0% 262 270 278 286 295 304
Special Items -3% (2,628) (2,707) (2,788) (2,872) (2,958) (3,047)
Tax Rate 27%
Pretax Income 15% 12,785 13,169 13,564 13,971 14,390 14,821
Income Taxes - Total 4% 3,468 3,572 3,679 3,790 3,903 4,020
Minority Interest 0% 148 152 157 162 167 172
Income Before EI&DO 11% 9,169 9,444 9,727 10,019 10,320 10,629
Discontinued Operations 2% 1,587 1,635 1,684 1,734 1,786 1,840
Net Income (Loss) 13% 10,756 11,079 11,411 11,753 12,106 12,469
Forecasting

9. Implied Stock Price estimated per Model Pessimistic Expected Optimistic
Future Sales Growth 1% 3% 16%
Implied Stock price (Beta = 0.31)
Discount Cash Flow Model 189$ 214$ 441$
Discounted Abnormal Earning Model 99$ 114$ 241$
Discounted Abnormal ROE Model 488$ 488$ 488$
Implied Stock price (Beta = 1)
Discount Cash Flow Model 62$ 70$ 140$
Discounted Abnormal Earning Model 22$ 26$ 60$
Discounted Abnormal ROE Model 155$ 155$ 155$
% change in Implied Stock price Compared to the
current Stock price Pessimistic Expected Optimistic
Future Sales Growth 1% 3% 16%
Implied Stock price (Beta = 0.31)
Discount Cash Flow Model 132% 163% 442%
Discounted Abnormal Earning Model 22% 40% 196%
Discounted Abnormal ROE Model 499% 499% 499%
Implied Stock price (Beta = 1)
Discount Cash Flow Model -24% -14% 72%
Discounted Abnormal Earning Model -73% -68% -26%
Discounted Abnormal ROE Model 90% 90% 90%
Current Stock Price 81.43$
Valuation Summary

10. Projected Company Data Using Historical Earnings Growth Rate
Year EPS DPS
Current $4.41 2.05 5.35 Earnings after 10 years
Year 1 4.50 2.09 24.83 Sum of dividends paid over 10 years
Year 2 4.58 2.13
Year 3 4.67 2.17 $96.45 Projected price (Average P/E * EPS)
Year 4 4.76 2.21 $121.27 Total gain (Projected Price + Dividends)
Year 5 4.86 2.25
Year 6 4.95 2.30 4.1% Projected return using historical EPS growth rate
Year 7 5.05 2.34 [(Total Gain / Current Price) ^ (1/10)] - 1
Year 8 5.15 2.39
Year 9 5.25 2.43
Year 10 5.35 2.48
Projected Company Data Using Sustainable Growth Rate
Year BVPS EPS DPS
Current $23.99 3.77 1.75 8.46 Earnings after 10 years (BVPS * ROE)
Year 1 26.01 4.08 1.89 29.74 Sum of dividends paid over 10 years
Year 2 28.20 4.43 2.05
Year 3 30.58 4.80 2.23 $152.45 Projected price (Average P/E * EPS)
Year 4 33.15 5.21 2.41 $182.19 Total gain (Projected Price + Dividends)
Year 5 35.94 5.64 2.62
Year 6 38.97 6.12 2.84 8.4% Projected return using sustainable growth rate
Year 7 42.25 6.64 3.08 [(Total Gain / Current Price) ^ (1/10)] - 1
Year 8 45.81 7.19 3.34
Year 9 49.67 7.80 3.62
Year 10 53.85 8.46 3.92
Buffet Valuation

11. • Per distress prediction model it was concluded that P&G does not face bankruptcy or considered in gray
area as Z is greater than 1.81 and does not fall between the range of 1.81 and 2.67. Therefore it should be
considered a safe investment
• In addition to that our estimated bond rating was close to the rating given by the bong agencies of AA - to
the company.
Debt Ratings: Median Financial Ratios by Category
*Rating is performed at the expected sales growth rate of 3%
2012 Rating
Earnings before interest and taxes to net capital 25% AA
Pretax interest coverage (EBIT/Interest expense) 20.7 AAA
Cash flow from operations to total debt 63% AA
Net debt to net capital 33% BBB
Actual Bond rating AA -
Z 3.1823
2012
X1 (0.02) Net working capital/total assets
X2 0.499198 retained earnigs/total assets
X3 0.120384 EBIT/total assets
X4 2.467636 market value of equity/book value of total liabilities
X5 0.63277 sales/total assets
Assessment of Solvency

12. • Industry not favorable for rapid growth
• Opportunities to grow in the emerging markets
• Renewed focus on investing in product innovation
• Valuations and forecasting models predict positive market price growth
• Solvency – not expected to experience bankruptcy in near future
• Will continue to grow steadily
• In the event economy grows rapidly, P&G will realize optimistic growth
rate of 16% in which case it would be a significantly profitable
investment at present.
• Looking at the current view of the economy and growth it is likely that
the company will follow the expected or pessimistic sales growth in
which case P&B would be a fair investment *assuming Beta = .31
Conclusion

13. Recommendation

14. Invest.

15. QUESTIONS?