Buffett Dumps PG While its High

So Procter & Gamble (PG) sold Duracell to Berkshire Hathaway for $3 billion. Good. Good for both companies. I think this fits the mold of what each is trying to do. Specifically:

• Procter & Gamble is getting rid of all its not-growth brands to focus on growth — earnings growth. Batteries aren’t a growth story, so PG management is ridding itself of a no-growth brand in exchange for PG stock that Berkshire currently holds.
• For Bershire Hathaway, this fits the mold of what Warren Buffett likes — a brand with everlasting value. He’s into brands he can buy which will last lifetimes — like P&G, Coke and trains. To put it in simple terms: Buffett pays $10 for a company, gets $1 per year for ten years, then still has a $10 company a decade later (or maybe more). And that’s what I think Ducacell is — a brand that will continue to deliver but likely won’t increase in value much.

The kicker is Berkshire is trading most of the PG shares it owns for Duracell. By trading and not selling the stock, it doesn’t have to pay capital gains taxes on the sale of the stock — and it has a ton of gains. Saving on taxes is smart, but selling PG this high is even better.

One Year Chart

Here’s the one-year chart of PG stock. The big thing here is the P/E of 20. Not since 2008 has PG garnered a median P/E of over 20. In fact, during 2010-2013 the median P/E was 15. I’m sure Buffett knows this too, and is using the strength to sell high

Notice on the right of the chart the stock has also had a poor five-year history of profit growth. Profits hit a high of $4.26 in 2009, and since then that number’s been a hurdle that hasn’t been overcome, and that is precicely why management is dumping these slow-growth brands.

But even though profits have been flat-lining, the stock’s been going up. PG used to regularly trade in the $60s.  Year after year (see for yourself the ten-year chart below). Now PG’s close to $90 — even though profits haven’t grown in five years.

Fair Value

PG has an Estimated Long Term Growth Rate of 8% per year, and if we tack on the 3% dividend then this company should have an estimated total growth rate of 11% a year. Since this is Proctor & Gamble with more than 100 years of history, the company is going to be around a while, and deserves a P/E of 17.

And as you can see to the right, this stock is overvalued. Not only overvalued, but it doesn’t look to have any upside potential even if we look out to 2016.

Sharek’s Take

Warren Buffett picked a good time to sell P&G stock. At 20x earnings the stock is overvalued. Even when I look out to 2017, my Fair Value is $87 — around where the stock is now. So PG could conceivably be the same price three years from now. I’d be a seller too.