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The Procter & Gamble Company (PG): 34% Upside With Little Risk?

Last month, I suggested that The Procter & Gamble Company (NYSE:PG) would be a good stock for a retiree’s portfolio. The company is built around a core of staple consumer brands such as Tide and Gillette, and isn’t likely to fade into obscurity anytime soon.

The Procter & Gamble Company (NYSE:PG)

But the story became more interesting when, late last week, activist investor Bill Ackman was successful in ousting the company’s (now former) CEO Bob McDonald.

In a presentation early in May, Ackman argued that new management could increase the company’s earnings-per-share to $6 within the next three years. If current valuations were to hold, that would mean a share price of about $110 — more than a 30% upside from current levels.

Ackman’s case for Procter & Gamble

For curious investors, Business Insider is hosting Ackman’s slides from his presentation at Ira Sohn. But to sum up Ackman’s argument: The Procter & Gamble Company (NYSE:PG) is a great business, it has just underperformed its potential.

Throughout the presentation, Ackman referred to promises made from the former (and now current) CEO AG Lafley. When he was heading the company in 2007, Lafley promised a number of performance improvements — improvements that have yet to materialize.

For example, Lafley believed that the company should be able to increase The Procter & Gamble Company (NYSE:PG)’s gross margin from 52% (the figure back then). Today, it’s less than that — 51.2% in the first quarter. An improvement from last year, but still below the expectations Lafley had set out in 2007.

Similarly, Lafley had said to expect an operating margin of at least 24% by 2010. But The Procter & Gamble Company (NYSE:PG) reported a figure of just 21% last quarter.

In short, Ackman believes that CEO McDonald was incompetent, and that AG Lafley should be better able to deliver on the promises he made. If that’s the case, shares could have further upside from here.

Ackman believes The Procter & Gamble Company (NYSE:PG) shares could be worth $125 — but that assumes a multiple of 20, and total dividends of $5 for 2014 and 2015.

Analysts at UBS largely agree with Ackman, although they are slightly less positive on the stock’s potential. UBS upgraded Procter & Gamble to a Buy on Friday, and raised its price target to $95. They cited the return of AG Lafley as the primary catalyst.

J.C. Penney Company, Inc. (NYSE:JCP) or Canadian Pacific Railway Limited (USA) (NYSE:CP)?

The Procter & Gamble Company (NYSE:PG) isn’t the first firm to hire a new CEO after Ackman began pushing for a change. In recent years, Ackman has driven out the former CEOs of both J.C. Penney Company, Inc. (NYSE:JCP) and Canadian Pacific Railway Limited (USA) (NYSE:CP) — but what followed couldn’t have been more different.