3 Reasons The Procter & Gamble Company (PG)’s Stock Is Overvalued

Some investors have such blind faith in certain companies that they can’t fathom their stock could be overvalued. This seems to be a particular problem when it comes to old-school companies that have been paying and raising dividends for a long time. However, as Peter Lynch once said, one of the most important keys to buying a “stalwart” stock is not paying too much. I know the company’s fortunes have improved recently, but based on three different measures, The Procter & Gamble Company (NYSE:PG) looks overvalued.

It’s Not The Company, It’s The Stock
I know that Procter & Gamble has been around forever and they have raised their dividend for a long time. I also know that I have many of their products sitting in my home right now. None of that is the point. The point is, the stock at today’s prices seems like a bad deal relative to its peers, and one in particular.

The businesses that Procter & Gamble operates in have undergone massive changes because of the Great Recession. Customers won’t flock to a product because of its brand name anymore. The economic turmoil of the last few years taught shoppers to look at prices. What many shoppers found is that store brand or competitors’ products were worthy substitutes for Procter & Gamble’s brands.

Innovation Is Key
In the current quarter, Procter & Gamble reported “core earnings up 12%” on a net sales increase of 2%. There was a consistent theme across the board — where the company innovated, they saw volume growth, where they did not, volume growth was flat or declined. In the company’s Beauty and Grooming segments, volumes were flat, and down 2%, respectively. In Health Care, Fabric, and Baby Care, volumes increased by 3%, 2%, and 6%. In each of these three cases, the company said this strength was from “new innovations” or “new product launches.”

A great example of one of these innovations is the company’s Tide Pods. These can be thrown in the washing machine and they dissolve and wash the clothes. This saves customers from having to pour messy detergent into the cap, measure it out, then pour it into the machine. The company is able to charge slightly more for Tide Pods, but customers appreciate the convenience.

So What Are the Issues?
To start with, Procter & Gamble is expected to have lower revenue growth compared to each of their large competitors. Colgate-Palmolive Company (NYSE:CL) is Procter & Gamble’s main competitor in the Home Care and Grooming segments, with the Colgate and Palmolive lines. In the next year, analysts are calling for 4.5% revenue growth at Colgate-Palmolive versus just 1.4% at Procter & Gamble.