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Nelson Peltz’s Trian Fund Management is looking to accelerate change at Procter & Gamble Co (NYSE:PG). After accumulating at least $3.5 billion worth of PG stock (as of February), the hedge fund activist is trying to get one of his guys on the company’s board. Shares are up 3.7% in the past month.
Source: Mike Mozart via Flickr (Modified)
Trian does not intend to break up P&G or replace current management, common activist investor tactics. Instead, Peltz seems to be content to apply pressure from within.
I would take any and all buy-side proclamations with a grain of salt, though. If breaking up PG or at least selling off some of its divisions proves the best way to realize higher valuations quickly, I doubt Peltz will hesitate to go in that direction.
Shedding Brands
PG’s existing portfolio of brands, like Tide, Olay, and Gillette, is indisputably strong. But growth is lacking, as is a pipeline of new products that could become billion-dollar brands. The innovation just hasn’t been there.
Since 2015, PG’s current strategy has been to thin out its portfolio and focus on growing a leaner number of strong brands. Some 43 beauty brands, including CoverGirl and Coty, have been spun off, and that was just the beginning.
The culling continues. PG management told the audience at last month’s Deutsche Bank Global Consumer Conference last month, the Cincinnati-based company now has about 170 brands. It wants to trim that number down to 65. This should translate into meaningful productivity improvements. In particular, cost reductions from office buildings to R&D centers to advertising will lead to sequential operating margin improvements.
Core Margins Improving
For the last three fiscal years, on a constant currency basis, core operating margin improved by 150 bps, 130 bps, and 240 bps, chronologically. Steady improvements over time will win the game for PG. The efforts have yielded respectable figures. From 2013 to 2016, the core gross margin improved by 3.9% (constant currency) and the core operating margin improved 5.2% (constant currency).
With Peltz using PG stock positions to bend management’s ear, investors can expect the company to continue squeezing inefficiencies out of their system, resulting in further margin improvements. Given the size of Procter & Gamble, the improvements will be incremental rather than huge leaps and bounds year-over-year, but the cumulative effect on the organization will be dramatic.