The hot news in the consumer goods industry is the change of The Procter & Gamble Company (NYSE:PG)’s CEO. A.G. Lafley, P&G’s former CEO will make his comeback to run the largest global consumer goods conglomerate, replacing Bob McDonald. The Procter & Gamble Company (NYSE:PG) announced that McDonald will step down to retire in June this year and he would receive no severance payments. The news has brought P&G more than $8.7 billion in market value with the share price rising more than 4% to $81.90 per share.
A.G.Lafley is the right choice
According to Financial Times, $2 million would be Lafley’s base salary. He could also participate in a bonus program that could get him an additional 250% of his base salary. I think the most important thing that Lafley did for The Procter & Gamble Company (NYSE:PG) during his first tenure was the $57 billion acquisition of the market leader in the global men’s blades and razor market, Gillette. With the acquisition, Gillette could enter fast-growing markets including China and Japan, and Gillette could be the main driver of P&G’s overall growth. Actually, Warren Buffett had ended up owning P&G stock via this acquisition. Before the deal, Berkshire Hathaway Inc. (NYSE:BRK.B) was the largest shareholder of Gillette with around 96 million shares, or a 9% stake. Buffett commented that it was a “dream deal.” Indeed, because of Gillette, the grooming segment could enjoy the highest pre-tax operating margin of 28.7% in 2012.
Unilever expands Hindustan Unilever’s stake
Under the leadership of McDonald, The Procter & Gamble Company (NYSE:PG)’s operating performance has lagged its closest peer, Unilever plc (ADR) (NYSE:UL), especially in the emerging markets. While only around 40% of its total revenue was derived from the emerging markets, these accounted for around 55% of total Unilever plc (ADR) (NYSE:UL)’s revenue in 2012. Although more than half of the sales come from the emerging parts of the world, Unilever plc (ADR) (NYSE:UL) hasn’t stopped there. Recently, the company announced that it had raised its stake in Hindustan Unilever from $52.5% to 75%, with the total cost of $5.4 billion. With 1.3 billion in population in India, Hindustan Unilever has become one of the most important parts in Unilever’s global map. Unilever’s COO Harish Manwani pointed out that Unilever saw rural India, with 700 million people, as one of the most biggest opportunities for growth.
P&G could reach $125 per share
The Procter & Gamble Company (NYSE:PG), under Lafley, will accelerate a $10 billion cost-savings program. According to activist investor Bill Ackman, that cost-savings program would be completed in the middle of 2016, including $6 billion in COGS reduction, $1 billion in marketing efficiencies, $1 billion in overhead savings and $2 billion in operating leverage. After that, P&G’s earnings before interest and taxes (EBIT) could experience significant improvement, from 18.8% to 25%. With the EBIT margin of 4%, combined with 6% organic growth in sales, Ackman believed that EPS could be $6 in 2016. With a multiple of 20, P&G’s share price could reach $125.