PG – Don’t Get Fooled Again

Takeaway: We think AG Lafley is a clear improvement over Bob McDonald, but we aren’t entirely convinced that Lafley is all that good.

This note was originally published May 24, 2013 at 10:25 in Consumer Staples

“Meet the new boss, same as the old boss.” – The Who



Last night, Procter & Gamble CEO Bob McDonald announced his “retirement” and former Chairman and CEO AG Lafley was named as President and CEO.  McDonald was facing a fair bit of external and internal criticism, and his retirement shouldn’t come as a complete surprise to the market.  We have a couple of thoughts on the situation.

  • We think Lafley is a clear improvement over McDonald, but we aren’t entirely convinced that Lafley is all that good – for example, the Gillette acquisition took place on his watch and we think it’s a horse race between PG/Gillette and GIS/Pillsbury for worst staples acquisition of the last 20 years
  • This doesn’t strike us as a permanent solution – AG Lafley is 65 and note that any likely successor to Lafley almost certainly lives and works in Cincinnati as I type this, so don’t expect a sea change in terms of philosophy or style going forward (this is part of the reason we questioned Pershing Square’s thesis on the name).
  • While PG stock was a strong performer during Lafley’s tenure, he had several notable tailwinds, including a period of strong global growth and a company in Unilever that was a fairly consistent share donor (the current Unilever is much, much more capable global competitor) – this goes back to our prior thought that while Lafley is better, better doesn’t necessarily equal good
  • It’s unclear to us what Lafley’s strategy will be, but there are only so many levers to pull – advertise, innovate and invest in price – none of those seem to be all that positive for the broader HPC space and likely not positive for PG’s earnings base.  2014 as a reset/investment year is a real possibility
  • At $82, PG is a do nothing for us and represents more than a little bit of the triumph of hope over experience, which we see as particularly fitting given that this is Lafley’s second “marriage” to PG (Samuel Johnson - “A second marriage is the triumph of hope over experience”)
  • We are happy to sit on the sidelines until we hear a clearly defined strategy and then perhaps wait a bit more until we see some positive impact from the implementation of that strategy – PG is a big ship to get moving
  • PG’s upgrade this morning by a large sell side firm strikes us as a “true-up” after being on the wrong side of the name for a good bit of time

 

Call with questions,

 

 

Rob

 

 

Robert  Campagnino

 

Managing Director

 

HEDGEYE RISK MANAGEMENT, LLC

 

E: rcampo@hedgeye.com

 

P: 203.562.6500

 

 

 

Matt Hedrick

 

Senior Analyst



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