Firstly, the price has run up to be well above what it should be if it was trading at a “normal” P/E ratio. At the end of 2021, PG was trading at $162 per share. This is around 35% above the normal PE ratio price. That may not sound like much, but it represents 4-5 years of average returns. So, if earnings continued growing at the expected rate, but PG traded back to its normal P/E ratio, you might break even on this investment around 2026.
The second problem (that is not so obvious from the chart) is that profit margins for the past few years have grown much quicker than revenues. That trend may be over. One key impact of higher inflation is that it tends to hurt company profit margins, as higher wages and other costs are eventually unable to be fully passed on to customers.
So, anyone buying Proctor & Gamble today may think they are buying an exceptionally high quality global company, with great management and market leading consumer brands. And they are. It’s just that they’re paying a big premium for the privilege, and taking the additional risk that profitability is near a cyclical high. That combination could deliver some very ordinary returns in coming years. Price matters.
The chart is taken from a much more detailed analysis by Michael Lebowitz at Advisor Perspectives, which you can read here.
Quote of the month.
“A portfolio that contains too little risk can make you underperform in a bull market, but no one ever went bust from that; there are far worse fates”
Kind of how we feel about markets right now.
This day in (financial) history.
In February 2000, online retailer Pets.com listed at $11 per share, valuing the company at $290 million. For the prior year, they had revenues of less than $1 million, after having spent $11 million on advertising. Their tag line was “Pets.com, because pets can’t drive.”
The company was to become the poster child for dot com excess. It was founded in 1998. In 1999, Amazon was an investor in their first round of venture funding, purchasing a significant stake in the company. Disney also invested. Pets.com spent most of the money on large warehouses and shipment infrastructure. They also purchased their biggest online competitor at the time, Petstore.com, for $10.6 million.
The Pets.com mascot, and star of their TV ads, was a sock puppet dog. The sock puppet attained cult status, and the company eventually offered them for sale. Despite the puppet’s success, Pets.com did not do well. The company’s demise was hastened because it lost money on nearly every sale it made. In 1999, it was selling merchandise for approximately one-third the price it paid to obtain the products. It turns out this was not much of a business plan. They did better in 2000, but still they took less in revenue than it cost them to actually buy the products.
On November 6th, 2000 – just 268 days after its IPO, Pets.com entered into a form of liquidation. Eventually, shareholders got 9 cents per share returned to them.
These days, the pets.com website is owned by PetSmart, which operates a large chain of stores in North America. PetSmart bought the website and some other assets of Pets.com in late 2000, having previously offered to buy the whole company for less than it’s cash backing.
In an interesting post script, eventually, the Pets.com concept was successfully realised by Chewy.com. Chewy was also owned by PetSmart for a time, until being floated in 2019. This prompted some comparisons between the two companies. Chewy’s founder, Ryan Cohen, rejected comparisons to Pets.com in 2019, saying “That is an absolute crazy comparison. I think there’s really nothing in common between those two businesses.”
Ryan, who has since left Chewy, was right (sort of). Chewy.com certainly does have sales greater than their cost to buy the goods, so they are at least doing something right. However, from the latest full year numbers available, to early 2021, we can see that Chewy had not yet turned a profit.
Currently, Chewy has a market capitalisation of $20 billion. Which is down from almost $50 billion in mid 2021. Which just goes to prove that history doesn’t repeat, but it does rhyme.
In February 1955, listed company Berkshire Fine Spinning Associates announced that it would acquire Hathaway Manufacturing Company. The combined company was to be called “Berkshire Hathaway Inc.”, and would have 10,000 employees and 14 textile plants.
However, joining forces did not save Berkshire from trouble. Over the next 7 years, Berkshire Hathaway would close 9 of its 14 manufacturing plants as the company’s value shrank by 37%. About then, a relatively unknown fund manager by the name of Warren Buffett began buying stock in Berkshire Hathaway. It was another three years before young Buffett would take control of the company. The rest, as they say, is history.
Vaguely interesting facts.
- Paraskavedekatriaphobia is the fear of Friday the 13th.
- Blood donors in Sweden receive a thank you text when their blood is used.
- According to a Japanese study, looking at cute animal pictures can boost your focus.
- St. Patrick wasn’t Irish. He was born to Roman parents in either Scotland, England, or Wales.
- Ben and Jerry originally wanted to start a bagel company. They ended up in the ice cream business because they couldn’t afford a bagel machine.
And finally…a story and some pictures about really big numbers.
“There are depressing moments. There are dark places. And then there’s being a 31-year-old man carefully stacking Sour Patch Kids on the kitchen counter in a silent apartment at 2:00am.”
Investing is all about the numbers, and in this piece from 2013, Tim Urban puts some visual perspective on really big numbers, with the help of a bunch of lollies.