September 19, 2011

Consumer Goods (Personal Products)

Henry Fund Research

Procter & Gamble (P&G)

Spencer Anderson
spencer-anderson @uiowa.edu

Investment Recommendation
Current Price Target Price Range

HOLD
$64.33 $76-79

INVESTMENT THESIS
(+) Procter & Gamble (P&G) is one of the most stable companies in the consumer staple sector with 50 individual brands that generate $1B in revenue/year. P&G uses the cash flows from these established brands to reinvest in a strong R&D department which continues to innovate and create new products and market segments. (+) Returned capital to shareholders continues to be strong with P&G a 3.3% dividend, which has increased every year for the past 55 years, and a strong $7.0B stock repurchase program with $6.0B expected to be repurchased in 2012. (-) P&G attempted to maintain prices during the recession which led to many consumers trading down to off-brands or private label staple products. The strong US middle class, which P&G targets, has seemed to disappear with much uncertainty as to when or if the middle class will return in the next 3-5 years. (-) P&Gs new pricing strategy does not fit with their business model. Moving down to assist the low-end consumer will deteriorate margins and likely does not allow P&G to increase prices once the US middle class recovers. We see relatively constant margins as higher margin levels in developing economies offset lower US margins. (-) P&G is highly levered to the success of Walmart. Walmart represents 16% of all revenues which allows disproportionate bargaining power against P&G during a time when Walmart is investing in private label branding. (+) International growth remains a catalyst for P&G. By establishing strong relationships with BRIC consumers, P&G will be in a strong position as the middle class grows. P&G intends to increase its average product offering/country from 19 to 24 by 2014 which will lead to higher revenues per consumer.

Source1: http://finance.yahoo.com

Key Stock Statistics1

52-Week Price Range Market Capitalization (B) Shares Outstanding (M) Institutional Ownership 60-Month Beta Dividend Yield Price/Earnings (ttm) Price/Book Price/Sales ROA (ttm) ROE(ttm) Projected 5-Year Growth $57.56-67.72 $176.76 2,750 58.1% 0.48 3.30% 16.37 2.61 2.09 7.42% 18.23% 9.40%
2012E 4.30 2013E 4.45 2014E 4.67

EPS ($)
Year EPS 2009 4.49 2010 4.32 2011 4.17
All earnings represent earnings from operations and have been filtered from net nonrecurring gains.

Valuation Models
Discounted Cash Flow Economic Profit Relative P/E Dividend Discount Model $90.15 $90.15 $56-61 $62.67

Important disclosures appear on the last page of this report.

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served 4.2 billion customers in 2011 and is on track to 3 serve 5 billion by 2015 . P&G had revenues of $83.81B in 2011 through its six reportable business segments: Beauty ($20.16B), Grooming ($8.03B), Health Care ($12.03B), Snacks and Pet Care ($3.16B), Fabric Care and Home Care ($24.84B), and Baby Care and Family Care ($15.61B).

EXECUTIVE SUMMARY

Procter & Gamble's (P&G) business is focused on providing branded products of superior quality and value. P&G's products are sold in more than 180 countries. In the FY11, ended June 30th, North America accounted for 42% of total sales, Western Europe 21%, Asia 15%, Latin America 9%, and other geographic areas 13%.

Source3: P&G 10k Source3: P&G 10k

P&G's customers include mass merchandisers, grocery stores, membership club stores, drug stores and highfrequency stores. Sales to Wal-Mart Stores, Inc. and its affiliates represented about 16% of total FY10 2 revenue . P&G's top 10 customers accounted for about 32% of total unit volume. We recommend a HOLD on Procter & Gamble because of its market position in a slowly recovering economic climate, uncertain pricing strategy in the US, strong ties to Walmart, strong strategic growth initiatives internationally, and its reputation in successfully launching new products. P&Gs strong relationships with its consumers result in a market position of 50+ number one brands worldwide. The 50 most successful brands accounted for 90% of its earnings in 2011. In the past 16 years P&G has had 132 products on SymphonyIRI Groups list of each years 25 most successful new products, more than their six largest 3 competitors combined .

P&G has seen strong growth in the Fabric Care and Home Care segment as well as Baby Care and Family Care segments since 2009. We see this continuing and expect Baby Care and Family Care growing between 36% and Fabric Care and Home Care growing between 3-5% through 2015. Other segments are expected to grow between 1-3% through 2015.

COMPANY DESCRIPTION
P&G operates manufacturing facilities around the world in order to distribute and sell its wide variety of products to every consumer on earth. Touching Lives, Improving Life, is the company motto as P&G tries to touch all lives in the world and improve each life 4 through P&G products . By operating manufacturing around the world P&G reduces the foreign exchange risk involved with selling products worldwide. P&G

Source3: P&G 10k

P&G uses the strong recurring revenues and cash flows from its six businesses and reinvests into R&D product development. This allows P&G to provide consumers with the most cutting edge products or concepts and establishes brand loyalty. According to CEO, Robert McDonald, Price promotion may win a quarter here and there, but innovation wins decades. P&G has executed on this strategy by continuing to innovate with new products and market segments like Crest Whitestrips, Liquitabs, and Febreze. P&G invests

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$2B/year (2.4% of sales or 12.6% of operating income) in R&D which is about 60% more than the closest competitor and more than most of its competitors combined. Beauty P&G is the global market leader in the Beauty category. P&G competes in many different product categories which are generally very fragmented including: cosmetics, female blades/razors, skin care, hair care, and prestige fragrances. Beauty Brands: Pantene Head & Shoulders Rejoice Venus Olay Covergirl Secret The Beauty segment distributes its products through the distribution channel located below. P&G mainly relies on mass merchandisers and supermarkets to sell its products and prefers not to sell its products through wholesalers or direct sellers. Beauty is expected to grow at a modest 1% in 2012 as the world economy continues to struggle and pick up to 3% in 2013-14. Proglide Braun Old Spice

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Fabric Care and Home Care This segment is comprised of laundry detergents, additives and fabric enhancers, dish washing liquids and detergents, surface cleaners, air fresheners, and batteries. P&G holds a #1 or #2 market share in fabric care markets it competes in with 30% of the global market. Home Care owns 15% of the market in the categories P&G competes in. Finally, Duracell batteries hold a 25% share of the global batteries market. Fabric Care and Home Care continue to be fast growing units with P&G continuing to monetize new markets like Febreze and Swiffer. We expect this unit to grow between 3-5% through 2015. Fabric Care and Home Care Brands: Febreze Dawn Tide Dash Ace Duracell Bounce Downy Cascade Baby Care and Family Care P&G mainly competes in diapers and baby wipes in this segment with approximately 35% of the global market share. Pampers is the companys largest brand with $9B in annual net sales. The paper products in this segment are mainly confined to North America and include Charmin bath tissue and Bounty paper towels. Baby Care and Family Care are expected to grow at 36% through 2015 as emerging economies are introduced into affordable paper products as substitutes to cloth options. Baby Care and Family Care Brands: Bounty Charmin Pampers Luvs Healthcare P&G competes in oral care, feminine care, and personal health. Through its brands, P&G holds a #2 market share in oral care with 20% of the global market. Feminine care products have a 30% share of the global market. In personal health P&G dominates the OTC heartburn market behind Prilosec OTC. Healthcare is expected to have modest growth of 1-4% through 2015.

Source5: Ibisworld.com

Grooming The majority of Grooming revenues come from male blades and razors. P&G leads in market share for this category in nearly all of the geographies it competes in. The global market share is north of 70%. The dominance in this area is a direct result of the $57B acquisition of Gillette in 2005. This deal included not only Gillettes signature razor line (Mach III, Fusion, Venus, Sensor), but also Duracell batteries, Braun and Oral-B brands in dental care. The grooming segment is expected to grow at 2% in 2012 before picking up to 4% growth in 2015. Grooming Brands: Gillette Fusion Mach3

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Healthcare Brands: Crest Oral-B Prilosec OTC Vicks Always Snacks and Pet Care The snacks segment of this business is a declining business due to the divestment of the Pringles brand to 6 Diamond Foods in April 2011 . This marked the final food brand divestment for P&G after selling Jif peanut butter, Folgers coffee, and Crisco shortening. P&G is focused on higher margin products with less competition. These divestments make sense within the P&G business model which revolves around products with long shelf lives and similar distribution channels. We believe this business unit will be renamed to Pet Care for 2012. We do not expect P&G to eliminate this segment because the margins on Pet Care are high and have less competition than the snack industry. This segment is expected to decrease by 15% in 2012 as the revenues from Pringles are removed before increasing by 5% in 2013.

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shareholders through dividends ($5.8B) and share repurchases ($7.0B). Divestment of Pringles As previously mentioned, the last remaining snack/food brand with P&G was divested in April 2011 to Diamond Foods for $2.35B. The transaction included $1.5B of Diamond Foods stock distributed to P&G shareholders. P&G will no longer compete in the snack segment and instead focus on higher margin businesses with better synergies. The distribution channels for snacks did not make sense for P&G with many smaller purchasers making it hard for P&G to maintain profitability while 4 continuing to have strong market share . Simplifying Businesses

Along with the divestment of the last of the remaining snack businesses, P&G is working on an initiative to simplify its businesses through the use of common packaging, formulas, equipment, and operational systems during manufacturing. P&G aims to move from more than 500 manufacturing platforms in 2009 to 150 by 2014. This will allow product to get to market sooner and around $500M in savings. Pet Care Brands: P&G is simplifying these processes by limiting the Iams amount of choices the consumer has through its Eukanuba product offerings. By using customer research and The Pet Care segment includes the premium Iams and deep shopper insights P&G plans on making the Eukanuba brands. This business is primarily located in productivity of its more than 50,0003 different product offerings by 30% in the next 3 years . Simplifying the North America where P&G has 10% market share. product offerings on the shelf will reduce confusion and increase cost savings. This coincides with the twoRECENT DEVELOPMENTS tiered pricing/branding strategy. Fourth Quarter Earnings Two-Tiered Pricing/Branding Strategy P&G reported Q4 2011 earnings on August 5, 2011 of $0.84/share compared to $0.71/share in Q4 2010. This The economic downturn has disrupted P&Gs strategy exceeded consensus of $0.82/share due to sales of dominating the upper tier of branded products in growth in Health Care, Home Care and Family Care, each segment. P&Gs strategy is typically to have the and other net income. Input costs were higher than #1 or #2 market share in each product category it expected as inflation continues to be a risk to P&Gs competes in. P&G has typically focused on serving the 7 margins . P&G guided $1.00-$1.04 Q1 EPS 2012 on 6- wealthy and strong US middle class with strongly 9% sales growth and $4.17-$4.33 for FY2012 on 5-9% branded household staple products. As shown by the sales growth. We expect P&G will come in on the lower charts below, the middle class has struggled during this side of this expectation ($4.17) as margins are downturn with a rising disparity in income inequality, squeezed due to the weak US consumer and P&Gs declining middle-class income, and a very negative new pricing strategy for some of its products. consumer confidence level for households earning 9 $35,000-$49,999 . Dividend Increase P&G increased its dividend by 9% to $0.525/qtr. or $2.10/share for the 2012 fiscal year. This marked the th 55 straight year P&G has increased its dividend and 8 has paid dividends to investors for 121 straight years . For fiscal year 2011 P&G returned $12.8B to

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extent of currency hedging. The key raw materials that impact the household products sub-industry include natural gas, crude oil, pulp and resin. Year to date through September 19, the Consumer Staples ETF (XLP) was up 4.33%, compared to a 4.25% drop for the S&P 1500 Index. In 2010, the sub-industry index advanced 4.4%, versus a 14.2% rise for the S&P 10 1500 .

Source9: Wall St Journal

MARKETS AND COMPETITION

This has resulted in P&G needing to lower prices for the middle class or risk losing sales through lower prices and coupons. The middle class has essentially evaporated and traded down to off-brand or no-brand staple products which has hurt P&G. To combat this, P&G has recently announced launching products aimed at the lower-income households. The consumers on the high end are still purchasing their trusted P&G products which enables P&G to execute an hour -glass branding strategy to keep margins on the high end, 1 while keeping volumes and market share on the bottom Source : Yahoo! Finance end. P&G operates in the Cosmetic & Beauty Products Manufacturing, Soap & Cleaning Compound INDUSTRY TRENDS Manufacturing, and Other Converted Paper Product Manufacturing industries which are driven by price and We have a neutral fundamental outlook for the brand awareness. The chart above highlights stock household products sub-industry for the next 12 performance of the past year for P&Gs main months. Across the U.S. economy, we think that growth competitors in these industries including: Colgatein total U.S. consumer spending will be stronger in 2012 Palmolive, Kimberly-Clark, Church & Dwight, and than it was in 2011. However, with the U.S. Energizer Holdings. None of these companies compete unemployment rate projected to be relatively high in with P&G in all of the industries it competes in which 2011 and gasoline and food costs rising, we expect that makes comparing the companies difficult. Colgateconsumers will be quite price-sensitive. In many Palmolive mainly competes in the Soap and Cleaning markets, branded companies like P&G will be vying for Compound Manufacturing. market share with private label (store brand) products. In our view, this competition, as well as the leverage of Price to Sales (2011) large retailers (specifically Walmart for P&G) has often restricted general price increases for household products. Economic growth and changing lifestyles in developing international markets should provide growth opportunities for this industry. We expect emerging international markets will see rising demand for packaged products that consumers could previously not afford. Companies in the household products areas have relied on product innovation to bolster sales and profit margins. A number of companies continue to control costs effectively and are looking for additional 5 ways to operate more efficiently . In the long run, partly due to the slow growth seen in developed markets, large multinationals will continue to seek growth opportunities in developing and emerging markets. For multinational companies, we expect that the impact of foreign currency translation will depend, in part, on which markets a manufacturer is selling to, and the

Source1: Yahoo! Finance

Price to sales (P/S) ratio measures how much investors are willing to pay for each dollar of sales. This chart shows the strong marketing companies in the Cosmetic & Beauty Products Manufacturing and Soap & Cleaning

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Compound Manufacturing like Colgate-Palmolive and Church & Dwight are priced at a premium for each dollar of sales compared to Kimberly-Clark who competes strictly in Other Converted Paper Product Manufacturing. P&G is in the middle which makes sense for the different business segments it competes in. Asset Turnover (2011)

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to develop new products and create new markets which allow them to establish the first relationship with the customer and also strong market share which allow for high margins on their new products. These new products and the relationship created with the consumer are what drive profitability for both companies. Companies which sell more commoditized products like the paper product offerings from KimberlyClark result in a lower margin due to the lack of differentiating factors in product offerings. Market Share (Cosmetic Manufacturing in the US) & Beauty Products

Source13: IBISworld.com

Source: MSN Money11

Asset turnover measures total sales divided by total assets. It measures how effectively a business is using its assets to generate sales. P&G is at the bottom of its competitors in this metric with a 0.6 value. P&G is the least efficient in asset turnover which is partly explained by the amount of R&D which gets capitalized on its balance sheet. Operating Margin (2011)

It is difficult to measure P&Gs market share against its competitors because it competes in a variety of consumer staple product categories and industries including Cosmetic & Beauty Products Manufacturing, Soap & Cleaning Compound Manufacturing, Other Converted Paper Product Manufacturing, and Pharmaceutical and Medicine Manufacturing. It is safe to say that P&G is by far the largest competitor in each of these industries. P&G uses its size and distribution channels to its advantage by reducing costs from suppliers and using its economies of scale. This is a large advantage when the largest portion of operating costs are from product purchases. Industry Costs (2010)

Source1: Yahoo! Finance

Operating margin is the measure of operating income over total revenues. A higher operating margin indicates a more efficient company allowing it to pay off its fixed costs. The difference in margins across the industry is a direct reflection on the relationships these consumer staple companies have developed with their customers. P&G and Colgate-Palmolive are the leaders in this category. Both companies invest in R&D

Source5: IBISworld.com

With 58% of costs coming from purchases from suppliers, market share and economies of scale are extremely important for manufacturers in this industry. As the largest manufacturer in the industry P&G takes advantage of its economies of scale to get the best possible price from its suppliers. P&G also focuses on products with long shelf lives in order to buy in bulk and

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store inventory for when it is needed. Management has guided that it intends on streamlining the manufacturing process by using similar inputs for many of its products which will give them greater leverage on suppliers going forward. The other large portion of costs come from the other category and include SG&A. This includes the large marketing budgets of many of these manufacturers as they try to educate consumers about new products and to promote existing products. P&Gs SG&A costs are much higher than the industry average due to the emphasis on marketing and creating a relationship with the consumer.

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next six months dropping to around 8.2% in the next two years. We feel the politicians in Washington will have the political will to pass a bill aimed at creating jobs and infrastructure in the US which will help bring the unemployment rate down. We also feel that if US businesses could gain some political/tax clarity it would lead to accelerated hiring. Many businesses are sitting on their hands waiting for D.C. to finalize financial, healthcare, and tax reforms before making investment/hiring decisions. The high unemployment rate during the recent recession has been a negative for P&G as consumers became more price sensitive and traded down from P&Gs higher end products to private label and off brands. We feel the above average unemployment rate going forward will continue to be negative for P&G as consumers will be more price conscious due to the freshness of the worst recession in recent memory.

ECONOMIC OUTLOOK
The recession in the US has been over for more than a year and a half, but there remain strong global economic risks and a fear that we may already be in a double-dip recession. High unemployment remains in many developed countries and European default risks also pose strong threats to the global economy. GDP

Real GDP grew by 1.3% in Q2 2011 growing for the 8th consecutive quarter. We feel real GDP will continue to grow around 1.5% in the next two quarters with a two year forecast of 3.0% average growth/quarter. This sluggish US recovery will continue to af fect P&Gs core consumers ability to pay for P&Gs premium products. Source13: Bureau of Labor Statistics Inflation Inflation has been low throughout the recession and recovery. In 2009 the CPI declined by 0.36% before rising to a moderate 1.64% in 2010. The Henry Fund fears a sharp spike in inflation as energy, grains, and metal prices have increased significantly in 2010 and the beginning of 2011. We expect inflation to rise to 2.3% in the short-term and increasing to 2.8% over the next two years. P&G continues to try to hedge this risk through derivative contracts, but increased input prices continue to be a concern for P&G. P&G uses interest rate swaps, forward currency swaps, and Source12: Bureau of Economic Analysis futures/options/swaps on commodities like oil, plastic resin, and other inputs. P&G has tried to maintain Unemployment margins/prices during this downturn and has realized many consumers are trading down to private label or Unemployment continues to be a concern on the cheaper brands. We feel P&G will continue to struggle outlook for the US economy. The rate continued to fall in passing on prices to US consumers if energy and in 2010 and stands at 9.1% in September of 2011. This input prices continue to spike. rate can be somewhat misleading because it does not account for all discouraged workers who have stopped looking for jobs. The consensus of the Henry Fund is a real unemployment rate around 9.1% for the

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and earnings for the 63% of revenues that occur outside of the US. Median Household Income The median household income continues to remain stagnant as the US economy struggles to grow. With median income at near 1998 levels, the disparity in income continues to be a negative for P&G. This recession has seen the middle class evaporate and with it P&Gs pricing power for its products which are mainly aimed at middle class America. We see continued stagnation in household incomes.

Source13: Bureau of Labor Statistics

Consumer Sentiment Consumer sentiment has plummeted over the summer and is testing its low in November 2008. The latest report of 57.8 for mid-September is a dramatic decrease from the 74.5 May report and slightly above the consensus of 56.0. This decrease in sentiment is due to the continued high unemployment, continued high energy prices, S&Ps downgrade of the US debt, and economic uncertainty in Europe. We feel consumer sentiment will improve to stay within the 6570 range over the next two years. This increase in consumer sentiment should benefit P&G as consumers become less price sensitive.

Source9: Wall Street Journal

CATALYSTS FOR GROWTH

International growth International growth will be the #1 catalyst for P&G going forward. The US market delivers 37% of the $82.6B in annual sales and an estimated 60% of the $11.8B in profit. P&G estimates US consumers spend $96/year per person compared with $4/year per person in China and $1/year per person in India and SubSaharan Africa. As US consumers continue to struggle P&G will have to look to growing economies like the BRICs where the middle classes are starting to demand quality consumer staple products. P&G is already entrenched throughout the world (180 countries), but is phasing in many of its branding/pricing strategies as the discretionary income for the middle class grows. For example, in India P&G introduced a low-cost Mach3 3 razor which gained 15% market share within the year . As salespeople and marketing continue to educate consumers about P&Gs superior razor products, it decided to launch a more premium product, the Gillette Guard. This strategy allows P&G to test the markets price sensitivity before launching more risky highmargin products. We see P&G continuing to use this strategy in a wide variety of their product segments in the BRIC countries. BRIC margins will be lower than developed economies as P&G captures market share.

Source14: Bloomberg Economic Calendar

Currency Risk With products in more than 180 countries, P&G faces significant currency translation risks. P&G attempts to hedge these translation risks using derivatives. It especially manages risk in countries with currency exchange controls like Venezuela, China, and India. We feel the dollar will strengthen against the Euro and Yen in the next two years which will be a negative for P&G as a stronger dollar will result in lower revenues

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Expanding Product Categories P&G competes in 38 product categories and, on average, compete in 19 categories in any given country. The US is the most developed market with 35 product categories. In China, Brazil, and India P&G competes in 18-19 categories. Mexico and Russia are in the 20s. P&G has a goal of raising the average amount of categories in any given country from 19 to 24 3 by 2016 . Joint Venture with Teva Pharmaceuticals

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INVESTMENT NEGATIVES

Walmart accounts for 16% of P&Gs revenues. This threatens margins and pricing power. Walmart can exert an extreme amount of pressure on P&G to continue to make P&G the preferred supplier for consumer staple products. If the US consumer continues to struggle it will be hard for P&G to continue demanding the preferred aisle and shelf placement or Walmart could decide to compete with its own private label products. With Walmart and P&G in our portfolio we are placing a large bet that these two companies will continue to be in bed with one another in the near term. This is an unnecessary risk, especially when we feel uncomfortable with the weakness of the US consumer going forward. The hour-glass pricing strategy is a risky and unproven. Management is executing this strategy after a failed attempt to maintain pricing/branding during the recession. This will cut into margins at a time where management has stated they want to divest non-core products/brands which do not have strong margins. P&G is such a behemoth of a company that it will be difficult for it to move the needle with any one new product innovation or establishment of a new market. Continued weakness in developed economies will test P&Gs margins as the middle class tries to stay afloat. Europe will see continue weakness through 2013.

P&G exited the pharmaceuticals business 2 years ago to focus on consumer-oriented healthcare. The joint venture is in negotiations and would give P&G access to: Tevas manufacturing scale as the largest prescription drug manufacturer in the world, their library of molecules, their regulatory capabilities, and pharmacy coverage in many markets. This would allow both companies to accelerate entry into additional OTC categories and markets. The venture is scheduled to 3 be finalized by the end of 2011 . P&G realizes their expertise is in marketing and that they can leverage their distribution channels to be a player to provide OTC medications.

INVESTMENT POSITIVES

P&G is the most well known consumer staple company in the world with strong brands and superior products. Continued innovation leads to new market segments and strong market share in nearly every category P&G competes in. With 24 brands producing more than $1B in annual sales and 50 leadership brands P&G has strong recurring sales and brand loyalty with much of its customer base. Growth in the BRIC countries is expected to be strong in the coming 7-10 years as economic growth leads to higher discretionary income for more than 3 billion consumers. 270 million consumers are expected to be added to Chinas middle class by 2020. P&G expects to serve 5 billion consumers by 2015. P&G provides a healthy dividend and share repurchase program to its shareholders. If growth prospects do not end up as rosy as we expect the 3.3% dividend yield and the $7.0B in share buybacks to continue to bring a strong return compared to its peers. We expect P&G to increase their dividend payout ratio to above 53% in 2015 from 47% in 2011.

VALUATION
Our HOLD rating is based on an expected price of $76$79. This range is given based on the prices for the three valuation techniques used. More weight was given to the DCF/EP model and DDM model when calculating this range because the relative P/E model does not reflect that P&G trades at a higher multiple because of its higher margins. The DCF/EP model produced a price of $90.15 while the DDM produced a price of $62.67 and the relative P/E produced a range of $56.22-$60.28 for 2011 and 2012 estimates.

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Revenue growth was modeled as follows in the 6 DCF/EP price is fairly sensitive to these costs with a business segments: 10% move in the stock when COGS and SG&A are moved 1%. SG&A expenses will vary as P&G launches into new product categories in emerging market countries. We have P&G as a HOLD. However, a few events could trigger us to review our decision: International growth increases significantly. International growth will be the key driver for P&G and an inability to enter some of the new markets through adding product lines would lead to increased organic growth and an appreciation in P&Gs future stock value.

A bounce back or catalyst to spark the middleclass American. A decline in unemployment or P&G is one of the largest product manufacturers in the increase in median incomes will help P&Gs core world and is not expected to grow faster than a few customer. percentage points based on its sheer size. P&Gs stated goal is 2-3% growth over Household Product Success in the hour-glass pricing strategy. It industry growth. The growth forecasts were calculated seems that helping the consumer trade down to lower based on managements stated growth in each margin or lesser quality goods does not align with segment as well as past performance. The 10% P&Gs business model because of the intense decline in revenues for Snacks and Pet Care is a result competition at the low end and the difficulties in passing of the Pringles divestiture. We envision muted 2012 on price increases once incomes increase. If the growth as the developed economies continue was volumes and margins end up being higher than struggle before an uptick in 2013 followed by expected, P&Gs earnings and stock value will be reasonable growth in 2014-15 to CV. We expect a higher than expected. slight decrease in margins through 2014 as P&G sells A divestment of Walmart in the Henry Fund. With more to emerging markets and struggles to pass on two companies so dependent on one another to costs to US customers. succeed, it seems counterintuitive to hold two low beta

consumer staple stocks that expose the fund to the P&G faces a large variety of competitors in a variety of same risks. If Walmart was divested, P&G would look industries including discount retailers, membership more attractive as an investment for the fund in this warehouses, grocers, and internet retailers. The sector. relative valuation model includes companies from all of these different industries. One thing to note is the inclusion in the first P/E calculation and then subsequent removal of AMZN in a second calculation due to it being an outlier relative to the other companies. Our models assume a risk free rate of 3.25% (30 Yr Treasury rate as of 9/18/2011) a market risk premium of 4.50%, a beta (3 yr monthly) of 0.48, cost of equity (CAPM) of 5.41%, a cost of preferred shares of 15.2%, and an after tax cost of debt of 3.33%. The WACC calculated using these inputs was 5.79%. The continuing value used in the model was a conservative 2.00%. We chose conservative estimates for continuing value because P&G is a very mature company. Cost of sales was modeled using the margins of each segment leading to a specific percentage of sales and is a very sensitive number for a firm with as large of sales as P&G. Cost of Sales along with SG&A expenses were modeled in the sensitivity tables. The

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REFERENCES
1. Yahoo! Finance: finance.yahoo.com 2. P&G Unhappy With Walmart Ventures Execution. Reuters.com. 3. P&G Annual Report 2011. 4. P&G Corporate About Us: http://walmartstores.com/AboutUs/295.aspx 5. IBIS World Industry Overview: www.ibisworld.com 6. Once A Great Flop, Now Sold for Billions. April 5, 2011. The New York Times. http://www.nytimes.com/2011/04/06/business/06pringles.html 7. Net Advantage. Standard & Poors Corporate News. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvant age/cp/showDailyNews.do. 8. Procter & Gamble Announces Another Dividend Increase. April 12, 2011. eDividend Stocks.com. http://www.edividendstocks.com/2011/04/procter-gamble-announcesanother-dividend-increase/ 9. As Middle Class Shrinks, P&G Aims High and Low. The Wall Street Journal. September 12, 2011. http://online.wsj.com/article/SB1000142405311190483610457655886 1943984924.html 10. Net Advantage. Standard & Poors Industry Review. September 19th, 2011. http://www.netadvantage.standardandpoors.com/NASApp/NetAdvant age/cp/companyIndustryPage.do 11. MSN Money: www.msnmoney.com 12. Bureau of Economic Analysis: www.bea.gov 13. Bureau of Labor Statistics: www.bls.gov 14. Bloomberg Economic Calendar: http://www.bloomberg.com/markets/economic-calendar/

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Henry B. Tippie School of Management

IMPORTANT DISCLAIMER
This report was created by a student(s) enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowas Tippie School of Management. The intent of these reports is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

11

Procter & Gamble Co. (NYS: PG)

Revenue Drivers For the fiscal year ended June 30th Revenues (Millions) Beauty Grooming Health Care Snacks and Pet Care Fabric Care and Home Care Baby Care and Family Care TOTAL Volume growth Beauty Grooming Health Care Snacks and Pet Care Fabric Care and Home Care Baby Care and Family Care Earnings (Millions) Beauty Grooming Health Care Snacks and Pet Care Fabric Care and Home Care Baby Care and Family Care TOTAL Margin Beauty Grooming Health Care Snacks and Pet Care Fabric Care and Home Care Baby Care and Family Care TOTAL 2008 19,515 8,254 14,578 3,204 23,714 13,898 83,163 2009 18,924 7,408 11,288 3,114 23,186 14,103 78,023 2010 19,491 7,631 11,493 3,135 23,805 14,736 80,291 2011 20,157 8,025 12,033 3,156 24,837 15,606 83,814 2012E 20,359 8,186 12,153 2,683 25,582 15,996 84,958 2012E 1% 2% 1% -15% 3% 3% 2013E 20,969 8,431 12,396 2,817 26,477 16,636 87,727 2013E 3% 3% 2% 5% 4% 4% 2014E 21,598 8,684 12,706 2,958 27,801 17,634 91,382 2014E 3% 3% 3% 5% 5% 6% 2015E 22,030 9,031 13,215 3,017 28,913 18,340 94,546 2015E 2% 4% 4% 2% 4% 4%

2% 5% 4% 3% 6% 4%

-2% -5% -3% -6% -3% 1%

3% 1% 3% 1% 6% 7%

4% 3% 5% 1% 7% 8%

2,730 1,679 2,506 261 3,411 1,728 12,315

2,664 1,359 1,835 234 3,032 1,770 10,894

2,712 1,631 1,860 326 3,339 2,049 11,917

2,686 1,477 1,796 241 3,009 1,978 11,187

2,690 1,529 1,840 245 3,020 2,020 11,344

2,720 1,575 1,910 235 3,090 2,110 11,640

2,680 1,720 1,940 240 3,130 2,340 12,050

2,790 1,810 1,990 245 3,240 2,580 12,655

13.99% 20.34% 17.19% 8.15% 14.38% 12.43% 14.81%

14.08% 18.35% 16.26% 7.51% 13.08% 12.55% 13.96%

13.91% 21.37% 16.18% 10.40% 14.03% 13.90% 14.84%

13.33% 18.40% 14.93% 7.64% 12.11% 12.67% 13.35%

13.21% 18.68% 15.14% 9.13% 11.81% 12.63% 13.35%

12.97% 18.68% 15.41% 8.34% 11.67% 12.68% 13.27%

12.41% 19.81% 15.27% 8.11% 11.26% 13.27% 13.19%

12.66% 20.04% 15.06% 8.12% 11.21% 14.07% 13.39%

Procter & Gamble Co. (NYS: PG)

Assumptions Current Price Balance sheet Normal cash Accounts receivable Total inventories Prepaid expenses & other current assets Property, plant & equipment at cost Accumulated depreciation Net property, plant & equipment Goodwill Trademark & other intangible assets, net Other non-current assets Accounts payable Marketing & promotion Accrued compensation Taxes payable Accrued & other liabilities Current portion of long-term debt Long-term debt Deferred income taxes Pension benefits & Other postretirement benefits Unrecognized tax benefits Other non-current liabilities Convertible class A preferred stock ESOP exercises Reserve for ESOP debt retirement Accumulated other comprehensive income (loss) Treasury stock, at cost Noncontrolling interest Commercial Paper $61.84 Income statement Cost of products sold Selling, general & administrative expense Tax rate (10K) Interest expense Other expenses Preferred Dividends 2012E 50.65% 29.80% 22.30% 4.28% 0.50% 0.25% 2013E 2014E 2015E 50.82% 50.93% 50.72% of sales Total debt of sales of sales

3.00% of sales 7.35% of sales 7.65% of sales 4.50% of sales 5.50% growth 6.00% growth 5.50% growth 57,562 Constant 32,620 Constant 5.25% of sales 8.50% of sales 3.65% of sales 2.15% of sales 1.50% of sales 4.25% of sales Taken from 10K 10.0% of non-cash assets 1,986 to zero 7.50% of sales 2326 Constant 1.6% of sales -70 per year 937 Constant -1,357 Constant -2,054 Constant 4000 increase/year 361 Constant 125% Inventory

Other Risk-free rate (30 yr treasury) Risk premium Beta (3 yr monthly) Cost of Equity (CAPM) YTM on 2034 bonds (mkt) Cost of Debt (post-tax) Cost of Preferred WACC Short term investment interest rate (2 yr t-bill) CV growth rate CV ROIC CV ROE

3.25% 4.50% 0.48 5.41% 4.28% 3.33% 15.20% 5.79% 0.16% 2.00% 20.79% 16.40%

Procter & Gamble Co. (NYS: PG)

As Reported Annual Income Statement (Millions) For the fiscal year ended June 30th Exchange rate used is that of the Year End reported date Year Net sales Cost of products sold Selling, general & administrative expense Operating income (loss) Interest expense Other non-operating income (expense), net Earnings (loss) from continuing operations before taxes Total current provision (benefit) for income taxes Total deferred income tax provisions (benefits) Income taxes Net earnings (loss) Preferred dividends, net of tax benefit Net earnings (loss) to common 2008 83,503 40,695 25,725 17,083 1,467 462 16,078 2,789 1,214 4,003 12,075 176 11,899 2009 79,029 38,898 24,008 16,123 1,358 560 15,325 3,436 596 4,032 13,436 192 13,244 2010 78,938 37,919 24,998 16,021 946 -28 15,047 4,065 36 4,101 12,736 219 12,517 2011 82,559 40,768 25,973 15,818 831 202 15,189 3,263 129 3,392 11,797 233 11,564 2012E 84,958 43,031 25,318 16,609 1122 425 15,063 3,359 3,359 11,704 212 11,491 2013E 87,727 44,583 26,143 17,001 1061 439 15,502 3,457 3,457 12,045 219 11,826 2014E 91,382 46,541 27,232 17,609 1104 457 16,049 3,579 3,579 12,470 228 12,241 2015E 94,546 47,954 28,175 18,418 1081 473 16,863 3,761 3,761 13,103 236 12,867

Year end shares outstanding Net earnings (loss) per share-basic Dividends per common share Payout ratio

3,033 $3.86 $1.45 37.56%

2,917 $4.49 $1.64 36.53%

2,843 $4.32 $1.80 41.67%

2,766 $4.12 $1.97 47.82%

2,757 $4.17 $2.15 51.59%

2,753 $4.30 $2.25 52.38%

2,752 $4.45 $2.35 52.84%

2,755 $4.67 $2.48 53.11%

Procter & Gamble Co. (NYS: PG)

As Reported Annual Balance Sheet (Millions) For the fiscal year ended June 30th Exchange rate used is that of the Year End reported date Year Cash & cash equivalents Accounts receivable Total inventories Prepaid expenses & other current assets Total current assets Property, plant & equipment at cost Accumulated depreciation Net property, plant & equipment Net goodwill & other intangible assets Other non-current assets Total assets Accounts payable Marketing & promotion Accrued compensation Taxes payable Accrued & other liabilities Current portion of long-term debt Commercial paper Total current liabilities Current portion of long-term debt Long-term debt Deferred income taxes Pension benefits & Other postretirement benefits Unrecognized tax benefits Other non-current liabilities Total liabilities Convertible class A preferred stock Common stock Reserve for ESOP debt retirement Accumulated other comprehensive income (loss) Treasury stock, at cost Retained earnings (accumulated deficit) Noncontrolling interest Total shareholders' equity (deficit) Total Liabilities and Owner's Equity

2008 3,313 6,761 8,416 3,785 22,503 38,086 17,446 20,640 94,000 4,837 141,980 6,775 2,760 1,527 945 5,610 1,746 11,338 30,958 1,746 23,581 9,793 3,658 4,496 72,486 1,366 64,309 -1,325 3,746 47,588 48,986 69,494 141,980

2009 4,781 5,836 6,880 3,199 20,696 36,651 17,189 19,462 89,118 4,348 133,624 5,980 2,378 1,464 722 3,926 6,941 9,379 30,901 6,941 20,652 9,543 5,314 2,705 1,408 70,523 1,324 65,125 -1,340 -3,358 55,961 57,309 63,099 133,622

2010 2,879 5,335 6,384 3,194 17,792 37,012 17,768 19,244 85,648 4,498 127,182 7,251 2,857 1,822 622 3,258 564 7,908 24,282 564 21,360 9,912 6,616 2,381 1,192 65,743 1,277 65,705 -1,350 -7,822 61,309 64,614 324 61,439 127,182

2011 2,768 6,275 7,379 4,408 20,830 41,507 20,214 21,293 90,182 4,909 137,214 8,022 3,058 1,874 786 3,572 2,994 6,987 27,293 2,994 22,033 9,930 6,275 2,326 1,356 69,213 1,234 66,413 -1,357 -2,054 67,278 70,682 361 68,001 137,214

2012E 5,952 6,244 6,499 3,823 22,519 43,790 21,427 22,363 90,182 4,460 139,525 7,221 3,101 1,827 1,274 3,611 3,839 7,844 28,717 3,839 22,375 7,944 6,372 2,326 1,359 69,094 1,164 67,350 -1,357 -2,054 71,278 76,245 361 70,431 139,525

2013E 2,435 6,448 6,711 3,948 19,542 46,198 22,712 23,486 90,182 4,606 137,816 7,457 3,202 1,886 1,316 3,728 2,229 6,244 26,063 2,229 22,556 5,958 6,580 2,326 1,404 64,886 1,094 68,288 -1,357 -2,054 75,278 81,876 361 72,930 137,816

2014E 3,276 6,717 6,991 4,112 21,096 48,739 24,075 24,664 90,182 4,798 140,739 7,767 3,335 1,965 1,371 3,884 3,021 6,448 27,791 3,021 22,765 3,972 6,854 2,326 1,462 65,169 1,024 69,225 -1,357 -2,054 79,278 87,649 361 75,570 140,739

2015E 2,843 6,949 7,233 4,255 21,280 51,420 25,520 25,900 90,182 4,964 142,325 8,036 3,451 2,033 1,418 4,018 2,300 6,717 27,973 2,300 22,966 1,986 7,091 2,326 1,513 63,855 954 70,162 -1,357 -2,054 83,278 93,682 361 78,470 142,325

Procter & Gamble Co. (NYS: PG)

As Reported Annual Cash Flow Statement (Millions) For the fiscal year ended June 30th Exchange rate used is that of the Year End reported date Year Cash & cash equivalents, beginning of year Net earnings (loss) Depreciation & amortization Share-based compensation expense Deferred income taxes Loss (gain) on sale of business Accounts receivable Inventories Accounts payable, accrued & other liabilities Other operating assets & liabilities Other operating activities Net cash flows from operating activities Capital expenditures Proceeds from asset sales Acquisitions, net of cash acquired Change in investments Net cash flows from investing activities Dividends to shareholders Change in short-term debt Additions to long-term debt Reductions of long-term debt Treasury stock purchases Impact of stock options & other financing activities Net cash flows from financing activities Effect of exchange rate changes on cash & cash equivalents Change in cash & cash equivalents Cash & cash equivalents, end of year Cash payments for: interest Cash payments for: income taxes 2008 5,354 12,075 3,166 555 1,214 432 -1,050 134 -1,239 527 15,814 -3,046 928 -381 -50 -2,549 -4,655 1,844 7,088 -11,747 -10,047 1,867 -15,650 344 -2,041 3,313 1,373 3,499 2009 3,313 13,436 3,082 516 596 -2,377 415 721 -742 -758 30 14,919 -3,238 1,087 -368 166 -2,353 -5,044 -2,420 4,926 -2,587 -6,370 681 -10,814 -284 1,468 4,781 1,226 3,248 2010 4,781 12,736 3,108 453 36 -2,670 -14 86 2,446 -305 196 16,072 -3,067 3,068 -425 -173 -597 -5,458 -1,798 3,830 -8,546 -6,004 721 -17,255 -122 -1,902 2,879 1,184 4,175 2011 2,879 11,797 2,838 414 128 -203 -426 -501 358 -1,190 16 13,231 -3,306 225 -474 73 -3,482 -5,767 151 1,536 -206 -7,039 1,302 -10,023 163 -111 2,768 806 2,992

Procter & Gamble Co. (NYS: PG)

Cash Flow Statement (Millions) Net Income Depreciation Accounts receivable Total inventories Prepaid expenses & other current assets Other non-current assets Accounts payable Taxes payable Marketing & Promotion Accrued Compensation Accrued & other liabilities Deferred income taxes Other non-current liabilities Pension and other LT benefits Cash from operating activities Property, plant & equipment at cost Cash from investing activities Commercial Paper Current portion of long-term debt Long-term debt Convertible class A preferred stock Common stock Dividends paid Preferred dividends paid Share repurchases Cash from financing activities 2012E 11,704 1,213 31 880 585 449 -801 488 43 -47 39 -1,986 3 97 12,697 -2,283 -2,283 857 845 342 -70 937 -5,928 -212 -4,000 -7,229 2013E 12,045 1,286 -204 -212 -125 -145 235 42 101 60 118 -1,986 44 208 11,467 -2,408 -2,408 -1,599 -1,610 181 -70 937 -6,194 -219 -4,000 -12,575 2014E 12,470 1,363 -269 -280 -164 -192 311 55 133 79 155 -1,986 58 274 12,007 -2,541 -2,541 204 792 208 -70 937 -6,468 -228 -4,000 -8,626 2015E 13,103 1,445 -233 -242 -142 -166 269 47 115 68 134 -1,986 51 237 12,701 -2,681 -2,681 269 -721 202 -70 937 -6,833 -236 -4,000 -10,453

Beginning cash Change in cash Ending cash

2,768 3,184 5,952

5,952 -3,517 2,435

2,435 841 3,276

3,276 -433 2,843

Procter & Gamble Co. (NYS: PG)

As Reported Annual Balance Sheet (Millions) For the fiscal year ended June 30th Year Cash & cash equivalents Investment securities Accounts receivable Total inventories Prepaid expenses & other current assets Total current assets Property, plant & equipment at cost Accumulated depreciation Net property, plant & equipment Goodwill Trademark & other intangible assets, net Other non-current assets Total assets Accounts payable Marketing & promotion Accrued compensation Taxes payable Accrued & other liabilities Current portion of long-term debt Commercial paper Total current liabilities Notes Capital lease obligations All other long-term debt Current portion of long-term debt Long-term debt Deferred income taxes Pension benefits & Other postretirement benefits Unrecognized tax benefits Other non-current liabilities Total liabilities Convertible class A preferred stock Common stock Reserve for ESOP debt retirement Accumulated other comprehensive income (loss) Treasury stock, at cost Retained earnings (accumulated deficit) Noncontrolling interest Total shareholders' equity (deficit) Total Liabilities and Owner's Equity 2008 3.97% 0.27% 8.10% 10.08% 4.53% 26.95% 45.61% 20.89% 24.72% 71.57% 41.00% 5.79% 170.03% 8.11% 3.31% 1.83% 1.13% 6.72% 2.09% 13.58% 37.07% 26.12% 0.49% 3.72% 2.09% 28.24% 11.73% 4.38% 5.38% 86.81% 1.64% 77.01% -1.59% 4.49% 56.99% 58.66% 83.22% 170.03% 2009 6.05% 7.38% 8.71% 4.05% 26.19% 46.38% 21.75% 24.63% 71.51% 41.26% 5.50% 169.08% 7.57% 3.01% 1.85% 0.91% 4.97% 8.78% 11.87% 39.10% 31.21% 0.50% 3.21% 8.78% 26.13% 12.08% 6.72% 3.42% 1.78% 89.24% 1.68% 82.41% -1.70% -4.25% 70.81% 72.52% 79.84% 169.08% 2010 3.65% 6.76% 8.09% 4.05% 22.54% 46.89% 22.51% 24.38% 68.42% 40.08% 5.70% 161.12% 9.19% 3.62% 2.31% 0.79% 4.13% 0.71% 10.02% 30.76% 24.89% 0.51% 2.38% 0.71% 27.06% 12.56% 8.38% 3.02% 1.51% 83.28% 1.62% 83.24% -1.71% -9.91% 77.67% 81.85% 0.41% 77.83% 161.12% Average 2011 3.35% 5.64% 0.73% 7.60% 7.82% 8.94% 8.99% 5.34% 4.42% 25.23% 28.00% 50.28% 24.48% 25.79% 69.72% 39.51% 5.95% 166.20% 9.72% 3.70% 2.27% 0.95% 4.33% 3.63% 8.46% 33.06% 27.59% 0.49% 2.23% 3.63% 26.69% 12.03% 7.60% 2.82% 1.64% 83.83% 1.49% 80.44% -1.64% -2.49% 81.49% 85.61% 0.44% 82.37% 166.20% 46.88% 21.45% 25.43% 72.71% 42.54% 5.62% 174.30% 8.21% 3.40% 2.04% 2.19% 9.97% 3.56% 11.27% 34.91% 24.39% 0.62% 3.83% 3.56% 31.90% 12.93% 5.97% 3.09% 4.69% 90.50% 1.73% 55.69% -0.51% -2.02% 64.64% 67.60% 0.42% 83.80% 174.30% 2012E 7.01% 0.00% 7.35% 7.65% 4.50% 26.51% 51.54% 25.22% 26.32% 67.75% 38.40% 5.25% 164.23% 8.50% 3.65% 2.15% 1.50% 4.25% 4.52% 9.23% 33.80% 0.00% 0.00% 0.00% 4.52% 26.34% 9.35% 7.50% 2.74% 1.60% 81.33% 1.37% 79.27% -1.60% -2.42% 83.90% 89.74% 0.42% 82.90% 164.23% 2013E 2.78% 0.00% 7.35% 7.65% 4.50% 22.28% 52.66% 25.89% 26.77% 65.61% 37.18% 5.25% 157.10% 8.50% 3.65% 2.15% 1.50% 4.25% 2.54% 7.12% 29.71% 0.00% 0.00% 0.00% 2.54% 25.71% 6.79% 7.50% 2.65% 1.60% 73.96% 1.25% 77.84% -1.55% -2.34% 85.81% 93.33% 0.41% 83.13% 157.10% 2014E 3.59% 0.00% 7.35% 7.65% 4.50% 23.09% 53.34% 26.35% 26.99% 62.99% 35.70% 5.25% 154.01% 8.50% 3.65% 2.15% 1.50% 4.25% 3.31% 7.06% 30.41% 0.00% 0.00% 0.00% 3.31% 24.91% 4.35% 7.50% 2.55% 1.60% 71.32% 1.12% 75.75% -1.48% -2.25% 86.75% 95.92% 0.40% 82.70% 154.01% 2015E 3.01% 0.00% 7.35% 7.65% 4.50% 22.51% 54.39% 26.99% 27.39% 60.88% 34.50% 5.25% 150.54% 8.50% 3.65% 2.15% 1.50% 4.25% 2.43% 7.10% 29.59% 0.00% 0.00% 0.00% 2.43% 24.29% 2.10% 7.50% 2.46% 1.60% 67.54% 1.01% 74.21% -1.44% -2.17% 88.08% 99.09% 0.38% 83.00% 150.54%

Procter & Gamble Co. (NYS: PG)

As Reported Annual Income Statement (Millions) For the fiscal year ended June 30th Year Net sales Cost of products sold Selling, general & administrative expense Operating income (loss) Interest expense Other non-operating income (expense), net Earnings (loss) from continuing operations before taxes Total current provision (benefit) for income taxes Total deferred income tax provisions (benefits) Income taxes Net earnings (loss) Preferred dividends, net of tax benefit Net earnings (loss) to common 2008 100.00% 48.73% 30.81% 20.46% 1.76% 0.55% 19.25% 3.34% 1.45% 4.79% 14.46% 0.21% 14.25% 2009 100.00% 49.22% 30.38% 20.40% 1.72% 0.71% 19.39% 4.35% 0.75% 5.10% 17.00% 0.24% 16.76% 2010 100.00% 48.04% 31.67% 20.30% 1.20% -0.04% 19.06% 5.15% 0.05% 5.20% 16.13% 0.28% 15.86% Average 2011 100.00% 100.00% 49.38% 48.65% 31.46% 31.36% 19.16% 19.99% 0.00% 1.01% 18.40% 3.95% 0.16% 4.11% 14.29% 0.28% 14.01% 1.34% 0.56% 18.92% 4.63% 0.43% 5.06% 14.69% 0.24% 14.84% 2012E 100.00% 50.65% 29.80% 19.55% 1.32% 0.50% 17.73% 3.95% 3.95% 13.78% 0.25% 13.53% 2013E 100.00% 50.82% 29.80% 19.38% 1.21% 0.50% 17.67% 3.94% 3.94% 13.73% 0.25% 13.48% 2014E 100.00% 50.93% 29.80% 19.27% 1.21% 0.50% 17.56% 3.92% 3.92% 13.65% 0.25% 13.40% 2015E 100.00% 50.72% 29.80% 19.48% 1.14% 0.50% 17.84% 3.98% 3.98% 13.86% 0.25% 13.61%

Procter & Gamble Co. (NYS: PG)

Weighted Average Cost of Capital (WACC) Estimation Risk-free rate (30 yr treasury) Risk premium Beta (3 yr monthly) Cost of Equity (CAPM) 3.25% 4.50% 0.48 5.41%

YTM on 2034 bonds (mkt) Marginal Tax Rate Cost of Debt MV Debt PV operating leases MV Equity Preferred Shares outstanding Price of Preferred (from 2011 Annual Report page 65) MV of Preferred Preferred Dividend Cost of Preferred Total Capital (D+E+P) Debt/Equity Weight of Equity Weight of Debt Weight of Preferred WACC

4.28% 22.30% 3.33% 31,302 1,274 171,033 1,234 12.96 15,993 1.97 15.20% 219,602 0.167 77.9% 14.3% 7.3% 5.79%

$ $

Procter & Gamble Co. (NYS: PG)

Value Drivers EBITA: Operating Revenues before taxes COGS SG&A Depreciation & Amortization EBITA Income Tax Provision Tax Rate Interest expense Other non-operating income (expense), net Adjusted Taxes (net) Less Total Adjusted Taxes Add: Change in Deferred Taxes NOPLAT Invested Capital Cash & cash equivalents (3% of sales) Receivables, net Inventories Prepaid expenses & other current assets Total operating current assets Operating Current Liabilities Accounts payable Marketing & Promotion Accrued compensation Taxes payable Accrued & other liabilities Total operating Current Liabilities Net Operating Working Capital ADD: net PPE ADD: net capital leases ADD: PV of Operating Leases ADD: Trademark & other intangible assets ADD: Other non-current assets SUBTRACT: Other non-current liabilities TOTAL INVESTED CAPITAL Core Value Drivers Return on Invested Capital (ROIC) Invested Capital NOPLAT Beginning Invested Capital ROIC (NOPLAT/Beginning Invested Capital Free Cash Flow (FCF) NOPLAT Change in Invested Capital FCF (NOPLAT - Change in Invested Capital Economic Profit (EP) Beginning Invested Capital ROIC WACC EP (Beginning Invested Capital * (ROIC-WACC) 2008 83,503 40,695 25,725 3,166 13,917 4,003 22% 1,467 462 4,106 4,106 250 10,061 2009 79,029 38,898 24,008 3,082 13,041 4,032 22% 1,358 560 4,157 4,157 -369 8,515 2010 78,938 37,919 24,998 3,108 12,913 4,101 22% 946 -28 4,095 4,095 -18 8,800 2011 82,559 40,768 25,973 2,838 12,980 3,392 22% 831 202 3,437 3,437 1,986 11,529 2012 84,958 43,031 25,318 2,627 13,982 3,359 22% 1,122 425 3,454 3,454 1,986 12,514 2013 87,727 44,583 26,143 2,772 14,230 3,457 22% 1,061 439 3,555 3,555 1,986 12,661 2014 91,382 46,541 27,232 2,924 14,685 3,579 22% 1,104 457 3,681 3,681 1,986 12,990 2015 94,546 47,954 28,175 3,085 15,332 3,761 22% 1,081 473 3,866 3,866 1,986 13,452

2,505 6,761 8,416 3,785 21,467

2,371 5,836 6,880 3,199 18,286

2,368 5,335 6,384 3,194 17,281

2,477 6,275 7,379 4,408 20,539

2,549 6,244 6,499 3,823 19,116

2,435 6,448 6,711 3,948 19,542

2,741 6,717 6,991 4,112 20,561

2,836 6,949 7,233 4,255 21,273

6,775 2,760 1,527 945 5,610 17,617 3,850 20,640 407 1,344 34,233 4,837 4,496 60,815

5,980 2,378 1,464 722 3,926 14,470 3,816 19,462 392 1,418 32,606 4,348 1,408 60,634

7,251 2,857 1,822 622 3,258 15,810 1,471 19,244 401 1,496 31,636 4,498 1,192 57,554

8,022 3,058 1,874 786 3,572 17,312 3,227 21,293 407 1,578 32,620 4,909 1,356 62,678

7,221 3,101 1,827 1,274 3,611 17,034 2,081 22,363 0 1,665 32,620 4,460 1,359 61,830

7,457 3,202 1,886 1,316 3,728 17,589 1,953 23,486 0 1,756 32,620 4,606 1,404 63,017

7,767 3,335 1,965 1,371 3,884 18,322 2,239 24,664 0 1,853 32,620 4,798 1,462 64,711

8,036 3,451 2,033 1,418 4,018 18,956 2,316 25,900 0 1,955 32,620 4,964 1,513 66,242

60,815 10,061 -

60,634 8,515 60,815 14.00%

57,554 8,800 60,634 14.51%

62,678 11,529 57,554 20.03%

61,830 12,514 62,678 19.97%

63,017 12,661 61,830 20.48%

64,711 12,990 63,017 20.61%

66,242 13,452 64,711 20.79%

10,061 10,061

8,515 -181 8,696

8,800 -3,080 11,880

11,529 5,124 6,405

12,514 -847 13,362

12,661 1,187 11,474

12,990 1,694 11,296

13,452 1,531 11,921

5.79%

60,815 14.00% 5.79% 4,994

60,634 14.51% 5.79% 5,290

57,554 20.03% 5.79% 8,197

62,678 19.97% 5.79% 8,885

61,830 20.48% 5.79% 9,081

63,017 20.61% 5.79% 9,341

64,711 20.79% 5.79% 9,706

Procter & Gamble Co. (NYS: PG)

Discounted Cash Flow (DCF) and Economic Profit (EP) Model Valuation Assumptions: CV growth CV ROIC WACC Cost of Equity 2.00% 20.79% 5.79% 5.41% 2012E 1 13,362 12,630 303,378 291 32,014 4,968 6,275 15,993 244,420 2,766 $ $ 88.37 90.15 1 19.97% 8,885 8,399 240,700 62,678 291 32,014 4,968 6,275 15,993 244,420 2,766 $ $ 88.37 90.15 2 20.48% 9,081 8,114 3 20.61% 9,341 7,890 3 20.79% 256,085 216,297 2013E 2 11,474 10,252 2014E 3 11,296 9,541 2015E CV 3 320,796 270,954

DCF Model

Discount Periods Free Cash Flow PV Total Plus: Excess Cash Minus: PV Debt Minus: PV of ESOP Minus: Underfunded Pension Minus: Preferred PV of Equity Shares outstanding Price Today's Price Discount Periods ROIC EP PV of EP Total Beg. Invested Capital Plus: Excess Cash Minus: PV Debt Minus: PV of ESOP Minus: Underfunded Pension Minus: Preferred PV of Equity Shares outstanding Target Price Today's Price

EP Model

Procter & Gamble Co. (NYS: PG)

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model 2012E EPS Key Assumptions CV growth CV ROE Cost of Equity Discount period Dividends Per Share Future Cash Flows Discounted Cash Flows Intrinsic Value $ 4.17 $ 2013E 4.30 $ 2014E 4.45 $ 2015E CV 4.67

2.00% 16.40% 5.41% 1 2.15 $ $ 2.15 62.67 $ 2.02 2 2.25 $ 2.01 $ 3 2.35 4 2.48 72.73 57.75

Procter & Gamble Co. (NYS: PG)

Relative P/E Analysis EPS 2011E $4.97 $4.86 $5.07 $2.18 $2.05 $5.32 EPS 2012E $5.29 $5.27 $5.57 $2.39 $2.29 $6.32 Average 4.30 Est. Price/ 5yr Gr. Revenue 5.58 1.09 7.30 1.31 8.96 2.73 11.40 2.33 11.00 0.83 9.60 1.09 8.97 1.56 11.26% 2.09 Ticker JNJ KMB CL CHD AVP ENR Company Johnson & Johnson Kimberly Clark Colgate-Palmolive Church & Dwight Co. Avon Products Energizer Holdings Price 63.64 67.23 88.96 42.17 21.10 68.97 P/E 11 P/E 12 12.8 12.0 13.8 12.8 17.5 16.0 19.3 17.6 10.3 9.2 13.0 10.9 14.5 13.1 14.8 14.4

$ $ $ $ $ $

PG

Proctor & Gamble

$ 61.84

4.17 $

Implied Value: Relative P/E (EPS11) Relative P/E (EPS12) Relative Price/Revenue

$ 60.28 $ 56.22 $ 46.26

Procter & Gamble Co. (NYS: PG)

Sensitivity Analysis Current price Target price $64.33 $ 90.15 $ 90.15 5.19% 5.39% 5.59% 5.79% WACC 5.99% 6.29% 6.49% 6.69% 1.50% 97.53 91.40 85.87 80.85 76.28 70.14 66.46 63.06 1.75% 103.83 96.94 90.77 85.21 80.18 73.45 69.45 65.76 CV growth 2.00% 111.12 103.30 96.36 90.15 84.56 77.15 72.77 68.75 CV growth 2.00% 87.61 89.02 90.15 91.08 91.86 Beta $ 90.15 27.80% 28.80% SG&A 29.80% 30.80% 31.80% 0.08 102.90 96.23 89.56 83.63 77.95 0.28 103.24 96.55 89.86 83.90 78.21 0.48 103.57 96.86 90.15 84.18 78.47 0.68 103.90 97.17 90.44 84.45 78.72 0.88 104.24 97.48 90.72 84.72 78.97 2.25% 119.64 110.68 102.78 95.78 89.53 81.31 76.48 72.08 2.50% 129.75 119.33 110.25 102.27 95.21 86.01 80.65 75.80

$ 90.15 16.79% 18.79% CV ROIC 20.79% 22.79% 24.79%

1.50% 79.17 80.10 80.85 81.47 81.99

1.75% 83.13 84.28 85.21 85.98 86.62

2.25% 92.73 94.42 95.78 96.91 97.85

2.50% 98.62 100.64 102.27 103.62 104.74

$ 90.15 27.80% 28.80% SG&A 29.80% 30.80% 31.80%

48.72% 115.65 108.93 102.22 96.26 90.54

49.72% 109.61 102.90 96.19 90.22 84.50

Cost of Sales (CV) 50.72% 51.72% 103.57 97.53 96.86 90.82 90.15 84.11 84.18 78.14 78.47 72.43

52.72% 91.50 84.78 78.07 72.10 66.39

Procter & Gamble Co. (NYS: PG)

Ratios & sanity checks Liquidity ratios Current ratio: (Current assets/current liabilities) Quick ratio: ((Cash + ST invest + A/R)/Current liabilities) Activity ratios Receivables Turnover: (Net sales/Avg A/R) Inventory turnover: (COGS/Avg inventory) Asset turnover: (Net sales/Avg total assets) Financial leverage ratios Interest coverage: (EBIT/interest) Debt to equity: (LT debt/equity) Debt to assets: (LT debt/assets) Profitability ratios Gross profit margin: ((Revenue - COGS)/Revenue) ROA: (Net income/total assets) Payout policy Dividend payout: (Dividend/net income) Historical Forecast 2011 2012E 0.763 0.784 0.331 0.425 2013E 0.750 0.341 2014E 0.759 0.360 2015E 0.761 0.350

3.556 5.924 0.602

3.393 6.201 0.609

3.456 6.750 0.637

3.471 6.793 0.649

3.459 6.743 0.664

19.03 0.324 0.161

14.80 0.318 0.160

16.03 0.309 0.164

15.96 0.301 0.162

17.03 0.293 0.161

50.62% 8.43%

49.35% 8.24%

49.18% 8.58%

49.07% 8.70%

49.28% 9.04%

47.82%

51.59%

52.38%

52.84%

53.11%

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol Current Stock Price Risk Free Rate Current Dividend Yield Annualized St. Dev. of Stock Returns

PG $61.84 3.25% 3.40% 21.00%

Range of Outstanding Options Range 1

Number of Shares 363

Average Exercise Price 51.75

Average Remaining Life (yrs) 5.30 $

B-S Option Price 13.68 $

Value of Options Granted 4,968

Total

363 $

51.75

5.30 $

21.06

4,968

Procter & Gamble Co. (NYS: PG)

Operating and Capital Lease Obligations Capital Leases 46 44 45 25 25 197 382 Operating Leases 264 224 192 173 141 505 1499 225 1273.8

Years Ended January 31, 2012 2013 2014 2015 2016 Thereafter Total Minimum Payments Less: Interest PV of Minimum Payments

Capitalization of Operating Leases Pre-Tax Cost of Debt Number Years Implied by Year 6 Payment Lease Commitment 264 224 192 173 141 252.5 4.28% 2 PV Lease Payment 253.2 206.0 169.3 146.3 114.3 384.7 1273.8

Year 1 2 3 4 5 6 & beyond PV of Minimum Payments

Procter & Gamble Co. (NYS: PG)

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding Number of Options Outstanding (shares): Average Time to Maturity (years): Expected Annual Number of Options Exercised: Current Average Strike Price: Cost of Equity: Current Stock Price: $ $ 363 5.30 69 51.75 5.41% 52.07 2012E 69 51.75 $ 3.55 4,000 52.07 $ 76.82 2,766 69 77 2,757 2013E 69 54.55 $ 3.74 4,000 54.89 $ 72.88 2,757 69 73 2,753 2014E 69 57.50 $ 3.94 4,000 57.86 $ 69.14 2,753 69 69 2,752 2015E 69 60.61 4.15 4,000 60.99 65.59 2,752 69 66 2,755

Increase in Shares Outstanding: Average Strike Price: Increase in Common Stock Account: Change in Treasury Stock Expected Price of Repurchased Shares: Number of Shares Repurchased: Shares Outstanding (beginning of the year) Plus: Shares Issued Through ESOP Less: Shares Repurchased in Treasury Shares Outstanding (end of the year)