Hedgie Loves The Procter & Gamble Company (PG)

What makes Ackman’s view on P&G most interesting is its valuation relative to comparable companies:

Procter & Gamble trades at a lower valuation than rivals despite the fact that it has both the potential for large cost savings by 2016 and opportunities to grow at high single-digits in emerging markets around the globe.

Put simply, investors are pricing P&G as if it will fail to realize a dime in cost savings or above-average growth in the top line. That doesn’t seem so likely. Ackman’s thesis working perfectly doesn’t seem so likely, either. Cost-cutting hasn’t gone entirely to plan, and a shrinking investment in marketing and branding may come at the cost of lost sales or market share.

However, for a massive, well-positioned consumer product company to trade at a discount to peers like Church &  Co., Inc. (NYSE:CHD) and The Clorox Co (NYSE:CLX), Procter & Gamble looks like a relative value. The Clorox Co (NYSE:CLX) has very little meaningful costs it can squeeze into profits after a highly-effective cost cutting program in 2003. Church &  Co., Inc. (NYSE:CHD) ramped its operating margins by nearly 5% on lower costs over the past five years.

Church & Dwight is perhaps the best comparable for P&G. Like Procter, its portfolio includes several number one brands in their categories. Its top brands include Arm & Hammer, Orajel, Oxiclean, Nair, Spin Brush, Xtra, First Response, and Trojan – all of which have a number one position in their category and are included in the 8 top brands at Church & Dwight. Clorox brands are positioned primarily in household cleaners. The company’s namesake bleach has a 50% share, while brands like Pine Sol, 409, and SOS further lock down the company’s position in the space.

Neither Church & Dwight or Clorox offer more margin expansion without higher prices – higher prices that would lead P&G to use its own inherent pricing power. That leaves Procter & Gamble as the only true home, health, and beauty player with upside in its own unique margin expansion as it rapidly slashes costs.

As such, Procter & Gamble makes for the only play in the space with the potential to drive profits solidly higher by trimming the fat. The market isn’t pricing it at a premium, meaning any cost savings is pure upside.

The article Ackman’s New Favorite Large Cap Stock originally appeared on Fool.com and is written by Jordan Wathen.

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