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Hedgie Loves The Procter & Gamble Company (PG)

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Hedge fund managers meet at the annual Sohn Conference, where they pitch their favorite ideas to raise money for pediatric cancer.

This year, Bill Ackman brought forth a simple idea, one which won’t draw him criticism like his Herbalife short last December.

Ackman says Procter & Gamble is a top pick

The Procter & Gamble Company (NYSE:PG)Pretty boring, right? The Procter & Gamble Company (NYSE:PG) takes the cake for being a stock for widows and orphans – a consistent dividend leader in the boring space of consumer goods. But Ackman may be on to something: P&G has real opportunity in foreign markets.

Bill Ackman’s firm, Pershing Square Capital, believes a combination of cost-cutting and foreign growth can lead to returns of more than 60% for investors who buy at the current price. One slide from his research shows The Procter & Gamble Company (NYSE:PG) has huge exposure to emerging markets:

At the mid-point, Ackman says The Procter & Gamble Company (NYSE:PG) can set the pace for 5% annual revenue growth. That kind of top-line expansion doesn’t seem to be priced into the company’s stock, given that it trades with a dividend yield of 3%. Slap on 5% growth in revenue in perpetuity, and consistent margins, and you have an 8% return per year already using a simple dividend discount model.

Foreign growth is often forgotten

Emerging markets can go ignored for a very long time, even in the largest of businesses. When Warren Buffett famously put more than a billion dollars in The Coca-Cola Company (NYSE:KO) in the 1980s, he drew criticism for buying one of the companies least likely to grow.

Except Buffett saw what no other investors did: soda consumption was rising per capita, and the number of people drinking soda was exploding, too. Combine more users with more consumption per user and you get a long-term, dividend-paying multi-bagger of a stock. Warren Buffett clearly won on that trade, and Berkshire Hathaway Inc. (NYSE:BRK.A) remains one of The Coca-Cola Company (NYSE:KO)’s biggest shareholders.

Ackman is onto the same idea for The Procter & Gamble Company (NYSE:PG). Ackman’s multiplier is in emerging market growth, and a huge billion-dollar cost-cutting program for The Procter and Gamble Company (NYSE:PG) that would leverage the company’s growing international sales.

Pershing Square sees the gross margin improving by just under 2% with SG&A expenses shrinking by 2016 to 27.5% of revenue. Should the cost savings develop atop slight margin expansion, Ackman puts P&G’s EBIT margin at 24% from 18.8%, adding roughly a third to profitability.

Given 5% annual revenue growth, The Procter & Gamble Company (NYSE:PG) would earn $6 per share by 2016, and an earnings multiple of 20 makes P&G a $120 stock by 2016.

Banking on small downside

Sometimes the market gives investors asymmetric risk profiles, where upside is better than the downside. If you find enough of these trades, winners balance out losers, and you get market beating performance.

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