Comment

Page 1

Equity Research
North America
United States of America

Procter & Gamble

Household & Personal Care

Reuters: PG.N Bloomberg: PG NYSE: PG

William Pecoriello

Strong 2Q; Right Moves

Ensure A Solid 05 Outlook

Javier Escalante
+1 (1)212 761 7965
Javier.Escalante@morganstanley.com

STOCK RATING
EQUAL-WEIGHT
Price (July 30, 2004)
$52.15
Price Target
$55
52-Week Range
$56.08-43.26
Stock ratings are relative to the analysts industry (or
industry teams) coverage universe.
GICS SECTOR
US Strategist Weight
S&P 500 Weight
WHATS CHANGED
2005 EPS estimate
2006 EPS estimate

August 02, 2004

Analysis of Sales/Earnings

+1 (1)914 225 4813

Bill.Pecoriello@morganstanley.com

CONSUMER STAPLES
12.4%
10.9%

$2.55 to $2.58
$2.80 to 2.85

PG beat our 2Q estimate by $0.01 and consensus by $0.02

2Q EPS of $0.50 was high quality driven by profits upsides across all divisions. Softer
op profit growth in Fabric & Home (4% vs. corporate average of +14%) reflects
P&Gs portfolio strategy, in our view. Organic sales of +8% was 100 basis points
ahead of mid-quarter guidance, which suggests that PG left F04 in a strong note.

P&G continues making the right portfolio moves

P&Gs F05 earnings seem to build on a more balanced top-line and margin math, as
expected. P&Gs reallocation of resources away from tissue through price increases
and the reinvestment of this upside into Wella is the right move. This investment in
Wella adds growth to P&Gs portfolio and likely extracts more value in the long-term.

We are raising 05 EPS to $2.58 or +11%-12% growth

Our 05 EPS excludes the impact of $0.02 gain from divesting Sunny D in F1Q05.
This revision accounts for greater comfort on: 1) the realization of price increases in
US tissue, 2) P&Gs flexibility to cover charges related to Wellas integration while
investing in its top-line, 3) the continuation of P&Gs emerging market momentum.

PG screens fair value after earnings changing

We are leaving our secular EPS growth unchanged at 10%, as 8% organic sales growth
in F4Q04 implies a 3 yr. run-rate of 4-5%, which is consistent with LT targets. We
estimate fair value at $53 today and leave our year-end PT at $55.

Industry View: In-Line

We find the HPC group fairly valued under a battery of valuation methodologies.

Morgan Stanley does and seeks to do business

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As a result, investors should be aware that the
firm may have a conflict of interest that could
affect the objectivity of this report. Investors
should consider this report as only a single
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Customers of Morgan Stanley in the United
States can receive independent, third-party
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call 800-624-2063 to request a copy of this
research.

FY ending Jun 30:

2003

2004

2005e

2006e

Modelware EPS ($)

Prior EPS Ests. ($)
First Call Consensus ($)
Revenue ($ m)
P/E
P/E Rel. to (local index) (%)
Price/Book
EV/EBITDA
Dividend Yield (%)

2.04

2.04
43,373
21.9

7.7
13.0
1.7

2.33

2.31
51,318
22.5

8.3
13.8
1.6

2.58

2.56
54,211
20.5

7.6
12.9
1.7

2.85

2.82
56,919
18.6

7.0
12.0
1.7

Market Cap ($ m)
Enterprise Value ($ m)
Debt/Cap (06/03)(%)
Return on Equity (06/03)(%)
Shares Outstanding (m)

144,803

35.8
41.1
2,776.7

Q'trly
2004e
EPS estmate

2005e
curr
prior

2006e
curr
prior

Q1
0.63

Q2
0.65

Q3
0.55

Q4
0.50

e = Morgan Stanley Research estimates; Please see explanation of Morgan Stanley ModelWare
initiative later in this report

Please see analyst certification and other important disclosures starting on page 10.

Page 2

Strong 2Q; Right Moves Ensure A Solid 05 Outlook

Company Description
Procter & Gamble (P&G) is a global consumer products company, with
leading worldwide market shares in the laundry detergent, hair care,
disposable diaper, and feminine protection segments

ModelWare is a proprietary framework for financial

analysis created by Morgan Stanley Research. This new
framework rests on the principles of comparability,
transparency and flexibility, and aims to provide
investors with better tools to assess the anticipated
performance of an enterprise.

Summary and Investment Conclusion

P&G posted another strong, top-line driven quarter

with earnings growth of 16%, exceeding our estimate by
$0.01. 2Q EPS of $0.50 was high quality driven by profits
upsides across all divisions. Softer op profit growth in
Fabric & Home (4% vs. corporate average of +14%) reflects
P&Gs portfolio strategy, in our view. Organic sales of
+8% was 100 basis points ahead of mid-quarter guidance,
which suggests that PG left F04 in a strong note. We also
note that P&G did not see the deceleration other CPG
companies and a few retailers experienced in July, which
implies that P&G still is ahead of the pack.
We believe that P&G continues making the right
strategic moves, as it is deepening its portfolio strategy
to extend this remarkable top-line momentum. As
expected, P&Gs F05 earnings growth builds on balancing
more the companys top-line with margin expansion,
reflecting both strategic moves and reporting mechanics
(e.g., the consolidation of Wella anniversaries in F1Q05).
P&Gs reallocation of resources away from slow-growth,
low-return businesses such as paper through price increases
and the reinvestment of that upside into Wella is the right
strategic move in two ways, in our view. First, Wella adds
growth to P&Gs portfolio. Second, by balancing
reinvestment and savings P&G will likely extract the most
long-term value out of this acquisition.
We are raising our F05 projection to $2.58 from $2.56 or
+11.6% growth, as we exclude the $0.02 gain from
Sunny D. This revision increases our 05 earnings growth
forecast from +10% to +11-12% beyond the reflection of
the slightly greater 04 base and accounts for our greater
comfort on: 1) the realization of the price increases in paper
and pet food to recover commodity inflation; 2) P&Gs
flexibility to cover charges related to Wellas integration
while investing in preserving its top-line, 3) the
continuation of the emerging market momentum well into
F05.

Specifically, ModelWare will provide the investor with:

a broad set of consistently defined forecast measures
an extensive taxonomy of more than 3500 unique
metrics for comparison
the flexibility to combine data elements and
create user-defined metrics for customized analytics
the transparency to see components of every
calculation
the ability to make rapid, meaningful comparisons
across companies, industries or geographies
For more information on ModelWare, please see
"Introducing ModelWare: A Road Map for Investors," by
Trevor Harris and team, August 2, 2004.
According to our estimates, the market has been
disciplined when valuing PG shares. Based on 10-year
DCF/ EVA models, we estimate the fair value PG shares at
$53 today, which continues to point at a year-end price
target of $55. This valuation reflects our new 05 earnings
growth outlook of 11-12% while maintaining a long-term
growth rate of +10%. We estimate that F4Q04 organic
sales of +8% implies a 3-year run-rate of +4.3%, which is
consistent with P&Gs long-term growth targets. We
believe that PG is a core holding for investors seeking
exposure to consumer staples. We reiterate our Equalweight rating on the stock.
How does F4Q 04 change our view?

We leave F04 with increased comfort about P&Gs

portfolio strategy, as management is

Investing to preserve Wellas momentum and retaining

a larger portion of its go-to-market capability. These
moves seek to extract the most long-term value out of
this acquisition.

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 3

Taking commodity-related price increases in US tissue,

pet food and coffee. More encouraging, price increases
are gaining traction in tissue, the most promotional
category within staples.

EPS of $2.58 includes a $0.02 gain related to the

divestiture of Sunny Delight. P&G will book this gain in
1Q 05 and expects the subsequent dilution to offset fully the
gain.

Increasing exposure to emerging markets and boost the

underlying growth of its portfolio.

What we liked?

In addition to reflect a 04 earnings base that is $0.01

higher, we are increasing our F05 EPS estimate to $2.58
from $2.56 to account for

At least partial realization of price increases in US

tissue during the 2nd half of 2004, given the likely
adherence by competitors and acceptance by retailers
such as Wal-Mart.

Restructuring charges related to Wella seem easily

covered within P&Gs budget for on-going
restructuring.

Our F05 EPS estimate excludes the $0.02 gain from the
Sunny D divestiture and therefore we are raising 05
earning growth rate from 10% to 11.6% to account for the
above and favorable macros in emerging markets.

Procters top-line momentum is solid across developing

and mature markets, which bodes well for F05. We
estimate that P&G is growing in mature markets (W Europe,
North America and Japan) at +7%-8% despite a tough retail
environment and the maturity of P&Gs household
categories still half of the portfolio. This strong growth
suggests significant share gains across most categories.
Volume growth of +20% in developing markets reflects
both strong market and P&Gs exposure to the right
markets, such as China and Russia, and faster growth of
personal care categories with the improved macros, we
believe.
Price increases to recover commodity inflation appear to
be gaining traction. Starting in F1Q05, P&G applied price
increases in US tissue, Iams pet food and is seeking price
realization in coffee. These increases, if well accepted by
consumers and retailers and at least partly followed by
competitors, should free resources up to drive growth in
higher return categories such as beauty and health care.

What happened?

4Q EPS of $0.50 or +16% growth exceeded our forecast

by $0.01 and beat consensus by $0.02. Earnings quality
was very good, as operating profit of +14% was 6 points
ahead of forecasted +8-9%.
4Q organic sales of +8% implies a 3-year run-rate of
+4.3%, which is consistent with P&Gs long-term
growth targets. Reported sales of +19% included 3 points
of FX and 8 points from acquisitions, both roughly in-line
with forecast. Unit volume growth of +10% matched our
forecast, pricing of (1)% was also in-line, while the
company had a bit of better mix of (1)% vs. our forecast of
(2)%. The most salient difference to our forecast was the
performance of Baby and Family Care, as P&G did
significantly better (+8% vs. our +6%) owing to strong
trends in diapers and paper towels. Please refer to Exhibit 1
for an analysis of 4Q results.
05 guidance of $2.58 confirms consensus earnings
growth rate of +10.5-11.0%. New guidance simply
adjusts for $0.02 upside in 4Q and new 04 earnings base of
$2.33.

Reinvestment to support Wellas top-line as P&G

integrates these operations. P&G opted to retain more of
Wellas go-to-market capability and invest behind Wellas
top-line. We view this move as a net strategic positive and
consistent with the acquisition rationale of this business.
This move seeks to balance the realization of savings and
top-line synergies from Wella, given the growth issues P&G
encountered with Clairols hair color business whose
integration focused first on savings and less on the top-line.
In early F1Q 05, P&G announced the layoff of 1,500
employees, 80% of which are Wellas and the balance from
P&Gs. The way we understand the mechanics of reporting,
P&G will be matching the charges on the Wella portion
against a balance sheet reserve, effectively neutralizing its
P&L impact. P&G will be incurring in charges related to
the PG side (the other 20% being laid off) which seems
easily covered by P&Gs budget for on-going restructuring
of $150-200M.
Gains from the rollout of Herbal Essences in Europe
and Japan balance the weakness of Clairols color
portfolio in the US. P&G acquired Clairol because of the
hair color and not the shampoo business but the fact that

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 4

Herbal Essences has generated good traction in Europe and

Japan offsets some of the growth issues Clairols hair color
still has domestically, and therefore is a positive.
What concerns us

Top-line comps get tougher in the 2H 05. If growth

comps are considered, P&G guidance embeds acceleration
of sales growth relative to F1Q 05 guidance: 1Q organic
sales growth of +4-6% on top of 7% year ago and F05
organic sales of +5-6% lapping a full year comp of +8%.
This is a combination of conservatism (mainly the
acceptance of the price increases on paper, pet food and
coffee) and the timing of the 05 new product pipeline, we
believe.

to reinvest a significant portion of its increases on Iams to

counter Nestles higher ad spending and promotions.
Share-driven growth might ultimately trigger
competitive responses. P&G continues managing is
portfolio, as suggested by the aggressive pricing in
detergents. In this BU, P&G profits growth decelerated to
only +4% despite 9% volume growth. Since we do not
believe the macros in emerging markets could have lifted
the underlying growth of a mature category such as
detergents to 9%, P&G share gains are likely accelerating.
Changes in competitors strategies can make the going
tougher from here.
Risks to our Procter & Gamble outlook

The efficiency of the ad spending to support Wellas topline might come down a bit during the integration. The
fact that P&G is backing Wella with higher reinvestment is
without a doubt a strategic positive, as it ensures that
Wellas top-line does not weaken at a time that LOreal is
aggressively investing. It is possible however that this
spending might not have the bang it would, given the
execution difficulties the integration would conceivably
generate.
We are factoring the success of price increases in US
tissue, pet food and coffee but only partial increases are
possible. P&G is passing through higher commodity prices
in tissue and pet food, while it is seeking better price
realization in coffee as well. We are now including for the
first time in our forecast the successful increase in US tissue,
as up to now we have remained skeptical given Wal-Marts
agenda with White Cloud and Georgia-Pacifics with
Brawny. We expect the competitive dynamics in US paper
to remain fluid, as the promotional environment is
improving in tissue but appears to be worsening in diapers.
In pet food, Nestle is restaging Purina and P&G might need

1) Wella integration risk and fixing Clairol business are key

challenges; 2) Over exposure to mature markets like the US
and Western Europe in mature categories such as paper and
detergents could slow growth below projected 4.5%; 3)
Procters mid-tier pricing strategy could slow profit growth
below forecasted +7%; 4) The risk of new acquisitions and
Procters growth strategy in paper can further dilute its
ROIC; 5) Channel migration could reduce economic returns
in the longer run; 6) sustained global economic weakness
could hinder Procters growth.
Valuation of Procter & Gamble ($53) shares

Based on our estimates, we believe that PG largely reflects

the current risk-reward tradeoff and rate the shares EqualWeight. We estimate a current fair value of $50 through 10
year discounted cash flow and EVA models using a WACC
of 9.1% and a terminal growth of 3.0%, which implies a $55
12 month target price. We also triangulate PG valuation
against relative and ROIC spread valuations vs. staples and
HPC sectors.

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 5

Exhibit 1

PG Earnings Analysis

PROCTER & GAMBLE

$ millions except per share

Quarter ending 6/30

Income Statement (FY ending June)

YAGO

FCST

Revenue, by segment:
Fabric + Home Care
Baby + Family Care
Beauty- Proforma
Health Care
Snacks + Beverages
Corporate
Total Revenue

$3,265
2,508
3,075
1,391
779
(98)
$10,920

$3,507
2,618
4,471
1,577
860
(160)
$12,873

% change vs. prior

COGS
Gross Profit
Marketing, R&D, Admin + Other
EBIT
Operating margin

7.6%

5,600
5,320
3,470
1,850.0
16.9%

% change vs. prior

Tax
Tax Rate

Net Income Available to Common, by segment:

Fabric + Home Care
Baby + Family Care
Beauty Care
Health Care
Snacks + Beverages
Corporate
Core Net Income
Preferred Dividends
Core Net Income to Common (Basic)
% change vs. prior

Preferred Dividend Impact on ESOP

Core Net Income to Common (Diluted)
% change vs. prior

Core Earnings Per Share

Basic
Diluted
% change vs. prior

Avg. Shares - Basic

Avg. Shares - Diluted

YAGO

FCST

$3,487
2,731
4,412
1,636
855
(159)
$12,962

$222
223
1,337
245
76
(61)
$2,042

($20)
113
(59)
59
(5)
1
$89

18.7%

11.1%

0.8%

(879)
1,163
(874)
289

63
151
(2)
149

6,479
6,483
4,344
2,139

15.5%

16.5%

(148) bps

(44) bps

(136)
24

(166)
56

(175.0)
16.0

(39)
(8)

(9)
(40)

$751
271
679
158
83
(204)
$1,738

$821
284
779
186
95
(285)
$1,880

$782
350
792
222
115
(281)
$1,980

$31
79
113
64
32
(77)
$242

($39)
66
13
36
20
4
$100

11.3%

8.2%

13.9%

2.7%

5.8%

522

577

606

(84)

(29)

30.0%

30.7%

30.6%

(57) bps

9 bps

499.0
165.0
466.0
110.0
55.0
(79.0)
$1,216
31
$1,185

534.2
192.8
501.6
130.3
41.7
(97.7)
$1,303
31
$1,272

523.0
201.0
532.0
138.0
77.0
(97.0)
1,374.0
33
$1,341

24.0
36.0
66.0
28.0
22.0
(18.0)
$158
(2)
$156

(11.2)
8.2
30.4
7.7
35.3
0.7
$71
(2)
$69

12.3%

7.3%

13.2%

0.8%

5.8%

Change vs. prior

Interest Expense
Interest & other income, net
Pre-tax Income by segment:
Fabric + Home Care
Baby + Family Care
Beauty- Proforma
Health Care
Snacks + Beverages
Corporate
Pre-Tax Income

17.9%

6,542
6,332
4,342
1,990

B/(W)

ACTUAL

2
$1,214

2
$1,301

0
$1,374

2
$160

2
$73

12.3%

7.2%

13.2%

0.9%

6.0%

$0.46
$0.43

$0.50
$0.49

$0.52
$0.50

$0.06
$0.07

$0.02
$0.01

13.2%

14.0%

15.2%

2.1%

1.3%

(33)
(26)

16
128

2,589
2,799

2,540
2,645

2,556
2,773

Source: Company accounts, Morgan Stanley Research

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 6

Exhibit 2

Procter & Gamble Earnings Model

PROCTER & GAMBLE

2004

2005E

2006E

2007E

2008E

2009E

$13,868
10,718
17,122
6,991
3,482
(774)
$51,407
11%
25,076
26,331

$14,260
11,387
18,893
7,655
2,930
(805)
$54,320

$14,831
11,728
19,932
8,574
2,989
(829)
$57,224

$15,350
11,963
21,028
9,431
3,034
(854)
$59,951

$15,810
12,202
22,184
10,280
3,079
(880)
$62,676

$16,205
12,324
23,405
11,205
3,079
(906)
$65,312

$ millions except per share

1Q04

2Q04

3Q04

4Q04

2004

1Q05E

2Q05E

3Q05E

4Q05E

$3,393
$3,407
$3,581
$3,487
2,607
2,673
2,707
2,731
3,753
4,492
4,465
4,412
1,728
1,908
1,719
1,636
896
931
800
855
(182)
(190)
(243)
(159)
$12,195 $13,221 $13,029 $12,962

$13,868
10,718
17,122
6,991
3,482
(774)
$51,407

$3,580
2,796
4,766
1,866
789
(189)
$13,608

$3,560
2,840
4,717
2,032
806
(198)
$13,757

$3,581
2,863
4,733
1,908
649
(253)
$13,481

$3,539
2,888
4,677
1,849
687
(165)
$13,474

Income Statement (FY ending June)

Revenue, by segment:
Fabric + Home Care
Baby + Family Care
Beauty- Proforma
Health Care
Snacks + Beverages
Corporate
Total Revenue
% change vs. prior

COGS
Gross Profit
Gross margin -- core

Marketing, R&D, Admin + Other

EBIT

51.2%

16,504
9,827.0

Operating margin

51.2%

17,681
11,630

4.8 %

29,244
30,707
51.2%

18,270
12,437

4.5 %

30,573
32,103
51.2%

18,841
13,262

4%

31,532
33,780
51.7%

19,657
14,123

12.9%

5,879
6,316
51.8%

3,673
2,643

20.2%

6,324
6,897
52.2%

4,155
2,742

22.3%

6,394
6,635
50.9%

4,332
2,303

18.7%

6,479
6,483
50.0%

4,344
2,139

18.5%

25,076
26,331
51.2%

16,504
9,827

11.6%

6,532
7,076
52.0%

4,148
2,928

4.1%

6,535
7,223
52.5%

4,241
2,982

3.5%

6,606
6,875
51.0%

4,296
2,580

4.0%

6,804
6,670
49.5%

4,395
2,275

19.8%

20.3%

20.7%

21.2%

21.6%

21.7%

20.7%

17.7%

16.5%

19.1%

21.5%

21.7%

19.1%

16.9%

14%
(629)
152

9.5%
(887)
205

8.0%
(889)
167

6.9%
(908)
171

6.6%
(957)
175

6%
(925)
177

10 bps

(90) bps

(151) bps

(44) bps

(72) bps

(16) bps

93 bps

146 bps

38 bps

(141)
40

(149)
29

(164)
67

(175)
16

(629)
152

(222)
51

(222)
51

(222)
51

(222)
51

$3,287
1,623
3,662
1,448
557
(1,227)
$9,350

$3,388
1,847
4,157
1,618
479
(1,407)
$10,083

$3,589
1,799
4,505
1,866
481
(1,333)
$10,908

$3,738
1,859
4,879
2,118
491
(1,386)
$11,700

$3,874
1,927
5,281
2,371
499
(1,471)
$12,480

$3,995
1,977
5,712
2,640
530
(1,478)
$13,375

$832
472
913
406
162
(243)
$2,542

$843
444
1,047
500
188
(400)
$2,622

$830
357
910
320
92
(303)
$2,206

$782
350
792
222
115
(281)
$1,980

$3,287
1,623
3,662
1,448
557
(1,227)
$9,350

$895
531
1,049
429
149
(295)
$2,758

$890
511
1,132
549
175
(445)
$2,811

$859
429
1,041
382
68
(370)
$2,409

$743
375
935
259
87
(295)
$2,105

7%

11.1%

13.5%

13.5%

13.9%

781

804

678

606

% change vs. prior

13 %

Tax

2,869

Tax Rate

Core Net Income

Preferred Dividends
Core Net Income to Common (Basic)
Preferred Dividend Impact on ESOP
Core Net Income to Common (Diluted)

51.3%

17,079
10,764

5.3 %

27,914
29,311

19.1%

Change vs. prior

Interest Expense
Interest & other income, net
Pre-tax Income by segment:
Fabric + Home Care
Baby + Family Care
Beauty- Proforma
Health Care
Snacks + Beverages
Corporate
Pre-Tax Income

5.7 %

26,476
27,843

30.7%

$6,481
131
$6,350
0
$6,481

% change vs. prior

Core Earnings Per Share

Basic
Diluted
% change vs. prior

Avg. Shares - Basic

Avg. Shares - Diluted

7.8 %

3,075
30.5%

$7,007
124
$6,883
8
$6,999

8.2 %

3,327
30.5%

$7,581
124
$7,457
8
$7,573

7.3 %

3,569
30.5%

$8,132
124
$8,008
8
$8,124

6.7 %

3,806
30.5%

$8,673
124
$8,549
8
$8,665

4,079
30.5%

$9,296
124
$9,172
8
$9,288

30.7%

$1,761
33
$1,728
0
$1,761

30.7%

$1,818
32
$1,786
0
$1,818

30.7%

$1,528
33
$1,495
0
$1,528

30.6%

$1,374
33
$1,341
0
$1,374

12.9%

2,869
30.7%

$6,481
131
$6,350
0
$6,481

8.5%

7.2%

9.2%

6.3%

841

857

735

642

30.5%

1,916
31
$1,885
2
$1,914

30.5%

1,954
31
$1,923
2
$1,952

30.5%

1,674
31
$1,643
2
$1,672

30.5%

1,463
31
$1,432
2
$1,461

13 %

8%

8%

7%

7%

7%

11.8%

14.4%

14.3%

13.2%

13.4%

8.7%

7.4%

9.5%

6.3%

$2.46
$2.33

$2.75
$2.58

$3.06
$2.85

$3.38
$3.14

$3.74
$3.46

$4.17
$3.84

$0.67
$0.63

$0.69
$0.65

$0.58
$0.55

$0.52
$0.50

$2.46
$2.33

$0.75
$0.70

$0.77
$0.72

$0.66
$0.62

$0.58
$0.54

14.2%

2,581
2,790

10.7%

2,504
2,722

10.5%

2,439
2,656

10.2%

2,368
2,585

10.2%

2,288
2,506

11.0%

2,202
2,419

12.5%

2,593
2,798

14.0%

2,591
2,801

14.6%

2,583
2,790

16.3%

2,556
2,773

14.2%

2,581
2,790

Source: Company accounts, Morgan Stanley Research

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

11.1%

2,531
2,748

10.8%

2,512
2,730

12.7%

2,495
2,713

8.0%

2,479
2,697

Page 7

Exhibit 3

Procter & Gamble Cash Flow Statement

PROCTER & GAMBLE

$ millions except per share

2004

2005E

2006E

2007E

2008E

2009E

Cash Flow Statement

Net Income from Continuing Operations
Adjustments:
Provision for Restructuring
Depreciation & Amortization
Other Non-cash Items
Changes in Working Capital
Other Non-current Assets & Liabilities
Net Cash from Operating Activities

$6,481

$7,007

$7,581

$8,132

$8,673

$9,296

1,733

1,803

1,885

1,990

2,116

2,261

434
714
$9,362

296
(637)
$8,470

132
216
$9,814

186
208
$10,515

59
206
$11,054

119
197
$11,873

Capital Expenditures
Asset sales or retirements (PP&E)
Sale/(Acquisition) of Businesses
Change in Marketable securities
Net Cash from Investing Activities

(2,024)
230
(7,476)
(121)
(9,391)

(2,173)

(2,289)

(2,398)

(2,507)

(2,612)

0
(2,173)

0
(2,289)

0
(2,398)

0
(2,507)

0
(2,612)

Purchase of Treasury Stock

Proceeds from Stock Options
Additions to Long-term Debt
Repayment of Long-Term Debt
Increase (Decrease) in ST Debt
Dividends Paid to Shareholders
Net Cash from Financing Activities

(4,070)
555
1,963
(1,188)
4,911
(2,539)
($368)

(4,000)
0
0
1,569

(4,400)
0
0
(5)

(5,500)
0
0
576

(6,875)
0
0
1,606

(8,250)
0
0
2,331

(2,816)
($5,247)

(2,929)
($7,333)

(3,038)
($7,962)

(3,138)
($8,407)

(3,227)
($9,145)

(46)
(443)
5,912
5,469

0
1,049
5,469
6,518

0
192
6,518
6,710

0
156
6,710
6,866

0
140
6,866
7,006

0
116
7,006
7,122

Exchange Rate Effect

Increase (Decrease) in Cash + Equivalents
Cash + Equivalents at Beginning of Period
Cash + Equivalents at End of Period
Source: Company accounts, Morgan Stanley Research

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 8

Exhibit 4

Procter & Gamble Balance Sheet

PROCTER & GAMBLE

$ millions except per share

2004

2005E

2006E

2007E

2008E

2009E

$5,892
4,062
4,400
2,761
17,115
14,108
23,900
1,925
$57,048

$6,941
3,358
4,715
2,118
17,133
14,665
23,712
1,925
$57,435

$7,133
3,459
4,741
2,226
17,560
15,257
23,524
1,925
$58,266

$7,289
3,542
4,887
2,182
17,900
15,853
23,336
1,925
$59,015

$7,429
3,617
5,026
2,281
18,353
16,433
23,148
1,925
$59,859

$7,545
3,680
5,097
2,377
18,699
16,972
22,960
1,925
$60,556

$11,306
2,554
13,860
20,841

5,069
$39,770

$11,126
1,999
13,125
20,841
1,569
1,562
2,869
$39,966

$11,313
2,179
13,492
22,410
(5)
1,625
3,023
$40,545

$11,525
2,337
13,863
22,405
576
1,689
3,167
$41,700

$11,742
2,493
14,235
22,982
1,606
1,751
3,311
$43,883

$11,912
2,672
14,584
24,587
2,331
1,808
3,450
$46,761

17,278
$57,048

17,469
$57,435

17,721
$58,266

17,315
$59,015

15,976
$59,859

13,795
$60,556

Balance Sheet
Assets:
Total Cash + Equivalents
Net Accounts Receivable
Inventories
Other Current Assets, incl. Def. Taxes
Total Current Assets
Property, Plant + Equipment
Net Goodwill and Intangibles
Other Assets
Total Assets
Liabilities + Shareholders' Equity:
Accounts Payable and Accrued Liabilities
Income Taxes
Total Current Liabilities
Old Total Debt
New Debt/(Debt Paydown)
Deferred Income Taxes
Other Long-Term Liabilities
Total Liabilities
Shareholders' Equity:
Total Shareholders' Equity
Total Liabilities + Shareholders' Equity
Source: Company accounts, Morgan Stanley Research

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 9

Modelware is a proprietary framework for financial analysis created by Morgan Stanley Research. This new framework rests
on the principles of comparability, transparency, and flexibility, and aims to provide investors with better tools to view the
anticipated performance of an enterprise. The result of an 18-month global effort, Modelware harmonizes the underlying data
and calculations in Morgan Stanley models with a broad set of consistently defined financial metrics. Our analysts have
populated the database with over 2.5 million data points, based on an extensive taxonomy of more than 3,500 unique metrics
and more than 400 Morgan Stanley calculations. The Modelware framework will also have the flexibility to allow analysts and
investors to add or change data elements, even quickly customize their own analytical approach.
What makes the Modelware architecture distinctive lies in the separation of data from calculations. Its transparency will permit
users to see every component of every calculation, to choose elements or recombine them as they wish without laborious
adjustments or recalculations. When choices must be made in defining standard or industry-specific measures, Modelware
defaults to economic logic, rather than favoring one accounting rule over another. This discipline facilitates comparability
across sectors and regions. Underlying the Modelware data is a new set of systems that check the internal consistency of
forecast data in each of our analysts models.
Modelware EPS illustrates the approach taken. It represents Modelware net income divided by average fully diluted shares
outstanding. Modelware net income sums net operating profit after tax (NOPAT), net financial income or expense (NFE), and
other income or expense. Modelware adjusts reported net income to improve comparability across companies, sectors, and
regions. These adjustments include the following: We exclude goodwill amortization and items deemed by analysts to be
one-time events; we capitalize operating leases where their use is significant (e.g., in transportation and retail); we convert
inventory to FIFO accounting when LIFO costing is used; and we include unrealized gains and losses on available-for-sale
securities in earnings (financial services companies only). For more information on these adjustments and others, as well as
additional background, please see Introducing Modelware: A Road Map for Investors, by Trevor Harris and team, August 2,
2004.

Procter & Gamble August 02, 2004

Please see analyst certification and other important disclosures starting on page 10.

Page 10

Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are
accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for
expressing specific recommendations or views in this report: William Pecoriello.

Important US Regulatory Disclosures on Subject Companies

The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively,
"Morgan Stanley").
As of June 30, 2004, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following
companies covered in this report: Avon Products and Kimberly-Clark.
Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Procter & Gamble and
Gillette.
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Procter & Gamble,
Colgate-Palmolive, Gillette and Kimberly-Clark.
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from
Procter & Gamble, Avon Products, Colgate-Palmolive, Gillette and Kimberly-Clark.
Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking
services from Avon Products, Colgate-Palmolive, Gillette and Kimberly-Clark.
Within the last 12 months, Morgan Stanley has either provided or currently is providing investment banking services to the
following companies covered in this report Procter & Gamble, Avon Products, Colgate-Palmolive, Gillette and Kimberly-Clark.
Within the last 12 months, Morgan Stanley has either provided or currently is providing non-investment banking, securities
related services to and/or in the past has entered into an agreement to provide services or currently has a client related
relationship with the following companies covered in this report Procter & Gamble, Avon Products, Colgate-Palmolive, Gillette
and Kimberly-Clark.
The research analysts, strategists, or research associates principally responsible for the preparation of this research report have
received compensation based upon various factors, including quality of research, investor client feedback, stock picking,
competitive factors, firm revenues and overall investment banking revenues.

Procter & Gamble August 02, 2004

Page 11

Stock Ratings
Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example,
Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A
rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of
all ratings used in each research report. In addition, since the research report contains more complete information concerning the analysts
views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or
research) should not be used or relied upon as investment advice. An investors decision to buy or sell a stock should depend on individual
circumstances (such as the investors existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of July 31, 2004)
Coverage Universe
Stock Rating Category

Count

% of
Total

Investment Banking Clients (IBC)

Count

% of
Total IBC

% of Rating
Category

Overweight/Buy
638
36%
271
41%
42%
Equal-weight/Hold
800
45%
297
45%
37%
Underweight/Sell
349
20%
94
14%
27%
Total
1,787
662
Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that
Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and
sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended
relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing
holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in
the last 12 months.

Analyst Stock Ratings

Overweight (O). The stocks total return is expected to exceed the average total return of the analysts industry (or industry
teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stocks total return is expected to be in line with the average total return of the analysts industry (or
industry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stocks total return is expected to be below the average total return of the analysts industry (or industry
teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in
a month, based on a quantitative assessment of historical data, or in the analysts view, it is likely to become materially more
volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are
automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more
volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March
18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to
www.morganstanley.com/companycharts.
Analyst Industry Views

Attractive (A). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be
attractive vs. the relevant broad market benchmark named on the cover of this report.
In-Line (I). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in
line with the relevant broad market benchmark named on the cover of this report.
Cautious (C). The analyst views the performance of his or her industry coverage universe over the next 12-18 months with
caution vs. the relevant broad market benchmark named on the cover of this report.

Stock price charts and rating histories for companies discussed in this report are also available at
www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585
Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.

Procter & Gamble August 02, 2004

Page 12

Stock Price, Price Target and Rating History (See Rating Definitions)

Procter & Gamble August 02, 2004

Page 13

Procter & Gamble August 02, 2004

Page 14

Procter & Gamble August 02, 2004

Page 15

Other Important Disclosures

This research report has been published in accordance with our conflict management policy, which is available at
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For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the
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This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings
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Procter & Gamble August 02, 2004

Page 16

Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.

Procter & Gamble August 02, 2004

The Americas

Europe

Japan

Asia/Pacific

1585 Broadway
New York, NY 10036-8293
United States
Tel: +1 (1)212 761 4000

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London E14 4QA
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INDUSTRY COVERAGE: HOUSEHOLD & PERSONAL CARE

Company
Avon Products
Colgate-Palmolive
Gillette

2004 Morgan Stanley

Ticker
AVP.N
CL.N
G.N

Rating
as of
O
07/06/04
O
10/31/03
U
09/11/03

Price
at 08/02/04
$43.23
$53.34
$39.12

Rating
Price
Company
Ticker
as of
at 08/02/04
Kimberly-Clark
KMB.N
U
01/06/04
$64.98
Procter & Gamble
PG.N
E
09/11/03
$53.34
Stock ratings are subject to change. Please see latest research for each company.