Procter & Gamble's Discount Expected To Continue

• Shares of Procter & Gamble Co. PG have declined 23.51 percent year-to-date.
• Morgan Stanley’s Dara Mohsenian reinitiated coverage of Procter & Gamble with an Equal-Weight rating and $78 price target.
• The stock has significantly underperformed down to all-time lows. However, given the weaker than peer organic sales and negative EPS revisions, upside appears limited.

“After analyzing several key points for PG, our view is that PG's current valuation discount vs. peers will likely persist with lingering fundamental pressure post a disappointing Q4,” Mohsenian explained.

According to the Morgan Stanley report, there are some potential changes that could help the company improve its performance over time. One hypothesis is that an activist investor emerges and pushes for changes that are accepted by the market. On the other hand, Procter & Gamble could look at a breaking up of the company, although the management has already stated this this strategy does not appear appropriate at present.

Mohsenian believes that the company might consider “re-basing EPS with reinvestment behind the business in order to drive improved market share trends,” or it could bring outsiders into the management team to foster new approaches and ideas.

Procter & Gamble might also consider “adopting a more realistic tone, which in our minds means management taking greater explicit responsibility for recent underperformance, thus giving investors greater confidence that management is addressing the current state of the business,” Mohsenian added.

However, given that most of the significant challenges faced by the company appear to be structural in nature, there appear to be limited catalysts and low visibility into a potential turnaround.