Colgate managed to post first-quarter 2013 earnings of $1.32 per share, which was up 6% year over year. The company also saw its gross profit margin expand by 40 basis points to 58.6%. The big positive for the company is that it expects to continue posting impressive growth. For 2013, management expects the company to see 5.5% to 6.5% growth in earnings year over year.
However, The Procter & Gamble Company (NYSE:PG) is the best-priced stock of the three, trading cheaper than its peers on both a price-to-earnings and price-to-operating-cash-flow basis.
| P&G | Johnson & Johnson | Colgate-Palmolvie | |
| Price to earnings | 19.8 | 23.2 | 24.6 |
| Price to operating cash flow | 14.7 | 16.4 | 20.4 |
Although Ackman has been the “loudest” P&G shareholder of late, he’s not the largest hedge fund owner of P&G by shares. Fellow billionaire Warren Buffett owns almost double the shares of Ackman (check out Buffett’s high upside picks). Meanwhile, Johnson & Johnson (NYSE:JNJ) has billionaire Ken Fisher (see Fisher’s cheap stock picks) as its top fund owner, and Colgate-Palmolive Company (NYSE:CL) calls Lansdowne Partners its top hedge fund shareholder by shares.
Ackman’s thesis
Ackman believes the company is under-earning relative to its intrinsic earnings power. He believes that with strategic initiatives the company could easily grow earnings from from $4 per share to $6 over the next couple of years.
If the company is able to reach this earnings potential of $6 per share, Ackman also sees the company being able to achieve an intrinsic value of $125 per share in approximately two years, suggesting around 60% upside.
Don’t be fooled
Although the upside sounds very appealing, The Procter & Gamble Company (NYSE:PG) still has a lot of work to do if it plans to meet Ackman’s expectations. After posting first-quarter earnings, P&G tightened its core 2013 earnings guidance from $3.94 – $4.04 per share to $3.96 – $4.04. However, to help turn the company around, P&G is now focusing on its 40 largest and profitable businesses.
These businesses account for about 50% of sales and 70% of operating profit. The company is also concentrating on its 10 most important developing markets, which should help drive Ackman’s expected robust revenue growth. Although I think it will be tough for P&G to hit Ackman’s targets over the next couple of years, even if the stock doesn’t hit the $125 Ackman target, if it at least reaches $100, that’s still 25% upside.
The article Billionaire Bill Ackman: CEO’s Clock Is Ticking originally appeared on Fool.com and is written by Marshall Hargrave.
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