Team 2Javier AzucenaValere MokubuChintankumar PatelJennifer PradereElisa ReyesMarcello Sobrinho

Financial Reporting and Analysis

Objective

• Perform a strategic, accounting, financial, forecasting, and valuation analysis on Procter & Gamble

• Make an investment recommendation

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

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

• 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

Financial Analysis

20032004

20052006

20072008

20092010

20112012

00.10.20.30.40.50.60.7

Gross Profit Margin

20032004

20052006

20072008

20092010

20112012

0

0.05

0.1

0.15

0.2

0.25

ROA

20032004

20052006

20072008

20092010

20112012

010,00020,00030,00040,00050,00060,00070,00080,00090,000

Sales

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0.50.60.70.80.9

11.11.2

Asset Turnover Ratio

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0

10000

20000

30000

40000

50000

60000

Gross Profit

20032004

20052006

20072008

20092010

20112012

02000400060008000

10000120001400016000

Net Income

Financial Analysis

Quick Ratio

20032004

20052006

20072008

20092010

20112012

00.20.40.60.8

11.21.41.61.8

2

20032004

20052006

20072008

20092010

20112012

0500

10001500200025003000350040004500Common Stock

20032004

20052006

20072008

20092010

20112012

10

15

20

25Price/Earnings

20032004

20052006

20072008

20092010

20112012

0123456789Mkt. Value of Equity

20032004

20052006

20072008

20092010

20112012

00.5

11.5

22.5

33.5

4Leverage

20032004

20052006

20072008

20092010

20112012

0.020.025

0.030.035

0.040.045

0.050.055

0.06Dep. & Amortization/Sales

• 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 ForecastFiscal 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

Implied Stock Price estimated per Model Pessimistic Expected OptimisticFuture 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

Projected Company Data Using Historical Earnings Growth Rate

Year EPS DPSCurrent $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 DPSCurrent $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

• 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 RatingEarnings before interest and taxes to net capital 25% AAPretax interest coverage (EBIT/Interest expense) 20.7 AAACash flow from operations to total debt 63% AANet debt to net capital 33% BBB

Actual Bond rating AA -

Z 3.1823

2012X1 (0.02) Net working capital/total assetsX2 0.499198 retained earnigs/total assetsX3 0.120384 EBIT/total assetsX4 2.467636 market value of equity/book value of total liabilitiesX5 0.63277 sales/total assets

Assessment of Solvency

• 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

Recommendation

Invest.

QUESTIONS?