Hooray, Procter & Gamble Is Under Attack!

Updated

Activist investing is the "Call Me Maybe" of the investment world. A couple of years ago, it probably wouldn't have garnered the same attention it has today. The timing just wasn't right. But, the times, they are a-changing. We live in a world where corporate governance is as important, if not more important, than income statements. With the information gap constantly narrowing, there is less and less separation between the shareholders and the boardroom. One could even make the argument that the future of publicly traded companies will be crowdsourced boardrooms.

Well, one experienced activist investor has words for one of the biggest conglomerates around: Change your strategy, you overpaid baby. Investors are hurting, because you're lazy.

A Procter gamble
Megacompany Procter & Gamble (NYS: PG) is the home of 26 brands with over a billion in net annual sales. You know these brands from your kitchen and your bathroom -- two places that ought not to share too many likenesses.


But even with a tremendous stable of brands, P&G has been hurting. Sales growth is sluggish and profit margins are narrow as the tepid economic recovery has consumers still in savings mode, purchasing private-label house brands over their pricier alternatives. Many investors and analysts have taken the fight to three-year CEO Robert McDonald. McDonald is, at this point, the center of the blame game for Procter's problems. Investors cite a lack of interest in emerging markets and a stubborn pricing strategy as two main reasons the company has fallen so far behind. Whether you agree with them or not, the fact remains -- Procter & Gamble needs a boost.

It's a bird! It's a plane! It's an activist investor!
When companies are in distress, they usually don't call out for someone to help them. But Bill Ackman thinks they do. As one of the most aggressive and public-facing activist investors, Ackman sets his sights high. His handiwork has resulted in the splitting up of Fortune Brands into Beam (NYS: BEAM) and Fortune Brands Home and Security (NYS: FBHS) . Both stocks are up substantially since their spinoff in 2011 and continue to be portfolio powerhouses. When his attention went toward Canadian Pacific Railway (NYS: CP) , the CEO was ousted and Ackman joined the board. The stock is trading nearly 77% above its 52-week low.

I don't always agree with Ackman's moves, and he's certainly had his share of missteps (Target, Borders), but the value activist is very good at getting companies to show unrealized value, usually through spinoffs or divestiture of assets.

And that's exactly what Ackman and his Pershing Square fund hope to accomplish with P&G. Investors and analysts alike are predicting Pershing's recent $2 billion investment in the company, which represents a little over 1% of the $178 billion conglomerate, is a stage for Bill Ackman to preach his value gospel to P&G's wide array of shareholders. Brands like Duracell and Braun, both ubiquitous names in their markets, have slowed down P&G because they have not adapted to recent market trends. High overhead costs have also kept profit margins startlingly low.

So many roads
Whether Procter spins off into more nimble and focused companies or sells some of its lackluster assets, it appears certain that serious change is needed to get the company back on the map.

If you believe in the long-term earnings power of Procter's brands, now may be a good time to get in on the action. Though the stock did receive a big boost after news broke of Ackman's involvement, it is still trading well off its 2008 high of $75. With an earnings report on the horizon that will likely disappoint investors, watch for a pullback and be ready to dive in on a short-term drop. I'm not a fan of market timing, but in this bipolar world of public markets, it can be worthwhile to take advantage of the inefficiencies.

On the other hand, this kind of unpredictable future for a company may shake up some investors. If you'd like to know about some companies with a steadier forecast that are sure to boost your returns, check out this report. It's about three well-known companies poised to win on emerging-market expansion and good ol' brand power.

The article Hooray, Procter & Gamble Is Under Attack! originally appeared on Fool.com.

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