The Procter & Gamble Company

Jake Rehtmeyer Analyst July 8, 2010

HOLD • Disciplined cash and cost management • Investing in capacity, innovation, and consumer

value this year • 23 $1 billion brands and 20 $500 million brands • Poised to grow in developing markets (low

costs, great growth potential) • Excellent consumer understanding, marketing,

and brand-building • Global economic conditions • Regulatory environment (environmental,

competitive laws) • Currency and debt exposure • Near-term results vs. Long-term growth • Growth strategy • Cost and price pressures • Regulatory environment The Procter & Gamble Company (P&G) is focused on providing branded consumer packaged goods. The Company’s products are sold in over 180 countries worldwide primarily through mass merchandisers, grocery stores, membership club stores, drug stores and in high-frequency stores, the neighborhood stores, which serve consumers in developing markets. As of June 30, 2009, the Company was organized into three Global Business Units: Beauty; Health and Well-Being, and Household Care. The Company had six business segments under United States Generally Accepted Accounting Principles (GAAP): Beauty; Grooming; Health Care; Snacks and Pet Care; Fabric Care and Home Care, and Baby Care and Family Care. In August 2009, AnimalScan, LLC announced that it has acquired Iams Pet Imaging, LLC from The Procter & Gamble Company and ProScan Imaging. In November 2008, the Company completed the divestiture of its Coffee business through the merger of its Folgers coffee subsidiary into The J.M. Smucker Company.

Ticker PG

Exchange NYSE

Industry Household Products

Sector Consumer Staples

Classification Income & Capital Appreciation

Market Cap. $175 B

52 Week Price range $39.37 - $64.58

Recent Price $59.38 (7/2/2010)

Current P/E 15.9

Projected 2012 P/E 15.2

2009 EPS $3.58

Projected 2012 EPS $4.26

Dividend Yield 3.2%

Debt Rating AA-

Beta 0.60

Pros:

Cons:

Critical Issues:

Brief Overview 1

Recommendation:

The EIF currently has 3.71% of equity assets invested in Berkshire. The stock falls within the Household Products industry of the Consumer Staples sector and is classified as an Income & Capital Appreciation stock with a dividend yield of 3.2%. Procter & Gamble accounts for 26% of Consumer Staples’ holdings. The sector comprises 11.46% of the S&P 500 Index and the EIF has an 11% target weighting for Summer 2010. The EIF is currently 3.37% underweight the Summer 2010 Income & Capital Appreciation target weighting of 30%.

Name Ticker Shares Cost Per Share

Holding Cost Basis Class % Equity %

Updated 07/01/2010 Consumer Staples ALTRIA GROUP INC COM * MO 1,303 $20.79 $27,095.55 24.3% 3.71% PROCTER & GAMBLE CO COM * PG 460 $57.32 $26,365.96 26.6% 4.07% DIAGEO PLC SPONSORED ADR* DEO 420 $70.70 $29,693.18 25.9% 3.96% PEPSICO INC COM** PEP 386 $57.76 $22,293.96 23.2% 3.54%

In October 2009, the EIF purchased 460 shares of PG at a cost per share of $57.32/share. These shares have gained 8.01% since the EIF bought the shares, and have gained 2.84% YTD.

The Procter & Gamble Company (P&G) is a very diverse company in its product offerings. It offers consumers products ranging from Pringles chips to Olay facial care. P&G segments itself into three main groups: beauty, health & well-being, and household care. IBIS World classifies P&G into many segments as well: Soap & Cleaning Manufacturing, Cosmetic & Beauty products, and Other Converted Paper Product Manufacturing etc. Because they account for the majority of P&G’s net sales, Soap & Cleaning and Cosmetic & Beauty will be the focus of this report. Soap & Cleaning Compound Manufacturing: This industry is mature with annual inflation adjusted revenue of $50.8 billion. There are three main segments in this industry: households, commercial users, and exports. Households comprise 51% of the industry participants. The soap & cleaning manufacturing industry encompasses many products. It includes dishwashing and laundry detergent, toothpaste, disinfectants, shoe polish, and other household cleaning agents. The concentration within this industry is low with the top four participants combining for less than 25% of the revenue.

PORTFOLIO CONSIDERATIONS

INDUSTRY OVERVIEW 2, 3

Innovation is a strength that has enabled soap and cleaning compound manufacturers to maintain growth. Slow growth in the US population, environmental awareness, and increasing regulatory pressure has driven innovation. Higher prices have been generated most notably with environmentally friendly “green” products, which are continuing to expand in popularity. Some of the impetus for the industry to go greener is coming from Walmart, which has been pushing manufacturers to shrink the size of their packaging. After nearly five years of industry players rising prices, retailers are expected to progressively press manufacturers for price rollbacks. Procter & Gamble is in the process of adopting a precise approach to lowering prices on about 10% of its portfolio of products. Lower prices will help to increase the number of items sold, keep products on the shelves of major retailers and compete with lower priced private label goods.

The resulting volume sales increases are expected to be countered somewhat by lower prices per item. As a consequence, revenue is expected to grow by a modest 4.3 % on average annually. As pricing pressure picks up, profit margin as a percentage of revenue is expected to fall to 10.6% in 2015 versus 11.5% in 2010. As far as regulation is concerned, the major regulating body is the FDA. The FDA governs the rules and regulations regarding manufacturing, oral products, and some soap products. Technically, the soap products are considered cosmetics; therefore any “cosmetics” are under the jurisdiction of the FDA. Cosmetic & Beauty Products Manufacturing: This industry is primarily engaged in preparing, blending, and compounding and packaging toilet preparations. Toilet preparations include many items that are used on a daily basis such as lotions, face creams, shaving preparations etc. Consisting of more than a thousand companies and marketing of over 20,000 cosmetic and toiletry brands, the cosmetics and toiletries (C&T) industry has enjoyed moderate growth over the past decade.

In 2008, the industry generated $52.40 billion in revenue, its highest level in a decade despite a slowdown in recent years. However, in line with its status as a mature industry and in view of recent recessionary conditions, the industry then recorded a small contraction in 2009 with estimated revenue of $51.0 billion. While some of these losses will be recouped during 2010, industry revenue for the year at an estimated $51.85 billion will still be below 2008 levels.

One of the main variables influencing industry performance in the immediate future will be changed consumer expenditure patterns with the impact of recently adopted frugal mindsets expected to linger. A marked change in consumer purchasing patterns was witnessed in 2009, with many opting to trade down to less expensive/private label products. A number of market segments are currently near or at saturation point (hair care and fragrances), while others are becoming crowded, such as the natural body-care segment. While this has been partly offset by the development of new markets/products such as cosmeceuticals, age-defying products, “male only” or “teen” products, these trends have a number of important implications for future industry growth.

Over the past decade the face of the industry has undergone significant change in the face of significant M&A activity which culminated in the $55 billion merger between Procter and Gamble (P&G) and The Gillette Company which was completed in late 2005 and has seen the creation of the world’s largest consumer products group (ahead of Unilever) with annual sales in the order of $60 billion and over 140,000 employees.

Procter & Gamble started out as a soap and a candle maker; merging their businesses in 1837. By 1859 P&G had become one of the largest companies in Cincinnati. Now Procter & Gamble is the world’s #1 maker of household products. It is divided into three global business units (GBU): beauty, health and well-being, and household care. P&G boasts a diverse portfolio of product offerings and plan to expand their mix and depth over the years to come. Nearly 80% of P&G’s sales and profit growth this decade has come from 10 businesses. P&G boasts 23 brands that are $1 billion brands, and 20 more that are greater than $500 million brands. They represent, currently, about 85% of P&G’s sales and 90% of profit. Some of their product offerings include: Febreeze, Tide, Downy, Charmin, Pampers, Iams, Pringles, Gillette, Pantene, Aussie, Old Spice, Ivory, Olay, Zest, Crest, Tampax, and Hugo Fragrance. From 2009 PG Annual Report: P&G’s business is focused on providing branded consumer packaged goods. Our goal is to provide products of superior quality and value to improve the lives of the world’s consumers. We believe this will result in leadership sales, earnings and value creation, allowing employees, shareholders and the communities in which we operate to prosper. Our products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores and “high frequency stores,” the neighborhood stores which serve many consumers in developing markets. We continue to expand our presence in other channels including department stores, perfumeries, pharmacies, salons and e-commerce. We have on-the ground operations in approximately 80 countries. Our market environment is highly competitive, with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers’ private-label brands. Additionally, many of the product segments in which we compete are differentiated by price (referred to as super-premium, premium, mid-tier value and low-tier economy products). Generally speaking, we compete with super-premium, premium and mid-tier value products and are well positioned in the industry segments and markets in which we operate— often holding a leadership or significant market share position. GLOBAL BUSINESS UNITS In fiscal year 2009, our three GBUs were Beauty, Health and Well- Being and Household Care. The primary responsibility of the GBUs is to develop the overall strategy for our brands. They identify common consumer needs, develop new product innovations and upgrades and build our brands through effective commercial innovations and marketing plans. Under U.S. GAAP, the business units comprising the GBUs were aggregated into six reportable segments: Beauty; Grooming; Health Care; Snacks and Pet Care; Fabric Care and Home Care; and Baby Care and Family Care. The following provides additional detail on our GBUs and reportable segments and the key product and brand composition within each.

COMPANY OVERVIEW 4, 5, 8

Beauty Beauty: P&G is a global market leader in the beauty category. Most of the beauty markets in which it competes are highly fragmented with a large number of global and local competitors. P&G is the global market leader in hair care with over 20% of the global market share. In skin care, its primary brand is Olay, which is the top facial skin care retail brand in the world. P&G is also one of the global market leaders in prestige fragrances, primarily behind the Gucci, Hugo Boss, and Dolce & Gabbana fragrance brands. Grooming: This segment consists of blades and razors, face and shave preparation products, electric hair removal devices and small household appliances. P&G holds leadership market share in the manual blades and razors market on a global basis and in almost all of the geographies in which it competes. P&G’s global manual blades and razors market share is approximately 70%, primarily behind the Gillette franchise including Mach3, Fusion, and Venus. Health &Well-Being Health Care: P&G competes in oral care, feminine care, pharmaceuticals, and personal health. P&G holds the number two market share position with approximately 20% of the global oral care market. In personal health, P&G is the market leader in nonprescription heartburn medications and in respiratory treatments with Prilosec OTC and Vicks, respectively. Snacks & Pet Care: In snacks, P&G competes against both global and local competitors and have a global market share of approximately 10% in the potato chips market behind its Pringles brand. In pet care, P&G competes in several markets around the globe in the premium pet care segment, with the Iams and Eukanuba brands. Household Care Fabric Care and Home Care: This segment is comprised of a variety of fabric care products, including laundry cleaning products and fabric conditioners; home care products, including dishwashing liquids and detergents, surface cleaners, and air fresheners; and batteries. In fabric care, P&G is the global market leader, with over 30% of the global market share. P&G’s global home care market share is over 15% across the categories in which it competes. In batteries, P&G competes primarily behind the Duracell brand and have over 25% of the global general purpose battery market share.

Baby Care and Family Care: In baby care, P&G competes primarily in diapers, training pants, and baby wipes, with approximately 35% of the global market share. P&G is the number one or number two baby care competitor in most of the key markets in which it competes, primarily behind Pampers, the company’s largest brand, with annual net sales of approximately $8 billion. P&G’s family care business is predominantly a North American business comprised primarily of the Bounty paper towel and Charmin toilet tissue brands, with U.S. market shares of over 45% and 25% respectively. Strategic Focus P&G is focused on strategies that we believe are right for the long-term health of the Company and will increase returns for our shareholders. The Company’s long-term financial targets are: Organic sales growth of 4% to 6%. This is comprised of: – 3% to 4% of market growth, plus – 1% to 2% of share growth º 0% to 1% of mix enhancement and whitespace expansion, plus º 1% of growth acceleration behind revenue synergies associated with the Gillette acquisition. Operating margin expansion of 50 to 75 basis points. Diluted net earnings per share (EPS) growth of 10%. Free cash flow productivity of 90% or greater (defined as the ratio of operating cash flow less capital expenditures to net earnings). – Capital spending at or below 4% of net sales annually. As a result of the recent global economic downturn, market growth rates have slowed and for 2010 are expected to be below the range that underpins P&G’s long-term financial growth targets. P&G is continuing to monitor market growth and may reassess its long-term targets in the future. In order to achieve these targets, P&G will focus on three primary areas: Grow its leading, global brands and core categories. P&G’s portfolio includes 23 brands that generate over $1billion in annual sales and 20 brands that generate approximately $500 million or more in annual sales. Combined, these 43 brands account for 85% or more of P&G’s sales and profits. These brands are platforms for future innovations that will drive sales growth, expand categories for retail customers and differentiate brands in the minds of consumers. P&G’s core categories, Baby Care, Blades and Razors, Fabric Care, Family Care, Feminine Care, Home Care, Oral Care, Prestige Fragrances, Retail Hair Care and Skin Care, have opportunities for continued growth. P&G will focus on profitable share growth across all of its businesses by leveraging its core strengths in innovation and brand-building.

Build business with underserved and unserved consumers. P&G is increasing its presence in developing markets, where 86% of the world’s population lives. P&G will increase the amount of sales from these markets by focusing on affordability, accessibility and awareness of its brands. P&G is extending its distribution systems to reach more consumers through underserved retail channels such as e-commerce and high frequency stores. And, P&G is creating a broader and deeper product portfolio. P&G’s initiative pipeline has new and improved products that extend and strengthen its category and brand portfolios vertically and horizontally. Continue to grow and develop faster-growing, structurally attractive businesses with global leadership potential. P&G is continually optimizing its portfolio of brands and businesses with an emphasis on opportunities in Beauty, Health Care and selective portfolio and geographic acquisitions in Household Care. P&G will also identify growth opportunities in services, particularly businesses that can be franchised and expanded rapidly. MAJOR & RECENT ACQUISITIONS & DIVESTITURES

2005 October 1st – Procter & Gamble acquired Gillette in 2005 for $57 billion in its largest acquisition to date. In 2004, the last full year before the acquisition, Gillette generated over $10 billion in sales. "This merger is going to create the greatest consumer products company in the world," said billionaire investor Warren Buffett. 2008 November 6th – P&G completed the divestiture of its coffee business through the merger of its Folgers coffee subsidiary into the J.M. Smucker Company (Smucker) in an all-stock reverse Morris Trust transaction. In connection with the merger, 38.7 million shares of P&G common stock were tendered by P&G’s shareholders and exchanged for all shares of Folgers common stock. P&G recognized an after-tax gain on the disposition of $2.0 billion, which is included as part of net earnings from discontinued operations. 2009 March 31st – Helen of Troy LP acquired the Infusion hair- care business of Procter & Gamble Co, a manufacturer and wholesaler of beauty and household products, for an undisclosed amount in cash. March 31st – RCJP Acquisition Inc acquired Johnson Products Inc, a manufacturer and wholesaler of hair care products, from Procter Gamble Co. June 4th – Procter & Gamble Co acquired The Art of Shaving, an Aventura-based retailer of razors and shaving products. August 10th – AnimalScan LLC acquired Iams Pet Imaging LLC, a San Francisco-based provider of MRI scanning services, from Procter & Gamble Co and ProScan Imaging LLC. October 30th – P&G sold its pharmaceutical unit to Warner Chilcott PLC for $3.1 billion in cash.

December 11th – Procter & Gamble Co agreed to acquire the Ambi Pur unit of Sara Lee Corp, a Chicago- based producer and wholesaler of meat and baked goods. 2010 February 4th – Procter & Gamble Co acquired the remaining interest in MDVIP Inc. May 27th – Hamco Inc, a unit of Crown Crafts Inc, acquired the Bibsters product line of Procter & Gamble Co. June 1st – P&G acquired Natura Pet Products Inc, a Davis-based producer and wholesaler of pet foods. Threat of Competition: HIGH P&G’s market environment is highly competitive, with global, regional, and local competitors. In many of the markets and industry segments in which P&G sells its products, P&G competes against other branded products as well as retailers’ private-label brands. There are many different options for consumer products. Consumers can choose not solely based on price but also brand strength and now there is even a push for environmentally friendly products. Although the options are abundant, the threat is still more moderate because of the brand equity in most products. Advertising and marketing are a large part of swaying consumers to purchase one product over another and the economies of scale that are presented with large companies (P&G) favor them in the advertising. Advertising also helps establish the brand loyalty. Although the consumer has many options to choose from it all comes down to the value and quality of the product. Product quality and performance are important and P&G focuses on providing a quality offering to the consumer. Competition is even present with the non-branded products and with consumer spending and disposable income low, competition is increasing. Threat of New Entrants: LOW-MODERATE The threat of new entrants seems to be low overall but it depends on which business segment of Procter & Gamble the threat is coming from. It is a low probability for a new entrant to become as big and as well capitalized as P&G. The biggest barriers to entry are derived from research and development. Since competition is somewhat intense, a new entrant must enter the market with a product that is differentiated. Again, reputable companies with successful brand names have established relationships with retailers and have advantages when competing for shelf space. Nearly all the markets that P&G participates in are mature markets making it less attractive for new entrants.

PORTER’S FIVE FORCES 2, 5, 9

Threat of Substitutes: LOW-MODERATE The threat of substitutes is moderate and not high because most of the products that P&G sells are necessities. There is no substitute for laundry detergent besides different types of laundry detergent. The only true substitute is to not wash your clothes or wash them without laundry detergent. It is similar for shaving and using diapers. However, some of the business segments i.e. snacks and beauty do have substitute products. That is why the threat of substitutes is low to moderate. Power of Suppliers: LOW Procter & Gamble does not seem to have any reliance on specific suppliers and P&G forms joint ventures and partnerships for new products. The sheer size of P&G also helps it deal with suppliers in delivering the product because companies want to work with P&G. Power of Buyers: MODERATE The power of buyers is moderate because as mentioned, 15% of P&G’s sales are to Wal-Mart who is a very demanding buyer. There are two tiers of buyers, the retailers and the end consumer. The retailers have more power in dealing with P&G because they have large contracts for many stores (Wal-Mart stores, Albertsons). Yet, many of these retailers enjoy having P&G products because of the profit potential they bring. The end consumer has moderate to high power. Although they have the decision on choosing substitutes or the competition, the success of P&G’s brands and the brand loyalty they have created thus far have shown that the consumers enjoy its products. t w Balancing Near-Term Results and Long-Term Growth P&G made two critical choices to deal with this macroeconomic environment: (1) to focus on disciplined cash and cost management and (2) to invest in capacity, innovation and consumer value this year to ensure P&G is leading and growing market share when we come out of the recession. P&G focused first on cash and costs to protect the financial foundation of its businesses. P&G increased prices to recover higher commodity costs and foreign exchange transaction impacts. Despite $4 billion in price increases, P&G has held global value shares cross the majority of categories, which is a reflection of P&G brands’ strength with consumers and retail customers. P&G knew that increased pricing would lead to market share volatility, and even some short-term share loss. P&G also knew higher prices might affect consumption in some more-discretionary categories. P&G was willing to accept these short-term consequences, however, to maintain investment-grade financial health. P&G made the cash utilization choices necessary to maintain its strong AA- credit rating, including increasing its share repurchases. Still, P&G repurchased over $6 billion in stock, retired another $2.5 billion as part of the Folgers divestiture, and returned over 100% of net earnings to shareholders through a combination of dividends and share count reduction.

CRITICAL ISSUES 5, 8

With P&G’s financial house in order, it focused next on innovation and brand-building. P&G identified and funded product innovation and marketing initiatives across the business, with an emphasis on growing profitable value share in P&G’s core categories. P&G also maintained its commitment to research and development investments and delivered strong consumer communication programs that emphasized the powerful performance-based value its products provide. P&G is planning the biggest increase in its manufacturing capacity in its history in order to expand into categories and countries where it doesn’t have a brand presence. By sourcing more in low-income markets, the company is able to reduce the cost of serving these markets while also being closer to regions with the greatest long-term growth potential. Strategy for Growth Three strategic choices drove virtually all of P&G’s top-line, bottom-line, and shareholder growth this decade. Its first choice was to focus on P&G’s core businesses and leading billion-dollar brands, to win with the biggest and strongest retail customers, and to win in the most important countries. It has done that. Nearly 80% of P&G’s sales and profit growth this decade has come from 10 businesses, including Baby Care, Blades and Razors, Fabric Care, Family Care, Feminine Care, Home Care, Oral Care, Prestige Fragrances, Retail Hair Care and Skin Care. About 75% of sales and profit growth has come from P&G’s leading billion-dollar brands. P&G chose to shift its business portfolio to more Beauty and Personal Care businesses. It has done that. The percentage of P&G sales in more capital-intensive Paper and Food businesses went from 42% at the beginning of the decade to 25%. At the same time, the percentage of sales in more asset-efficient, faster-growing, higher-margin businesses has increased from 18% to 33% over the same period. Beauty, Personal Care and Health Care have accounted for more than 60% of sales and profit growth in the past eight years. P&G’s third strategic choice was to extend the availability and affordability of P&G brands to more low-income consumers, particularly in developing markets. It has done that. Developing markets represent 32% of sales, up from about 20% at the beginning of the decade, and have contributed 42% of sales growth and 29% of profit growth. On an aggregate basis, P&G has a 19% share in developing markets and is growing steadily by about half a share point a year. P&G now has a developing-market business which, at about $25 billion in annual sales, is over five times the average developing-market sales of P&G’s major competitors. With these three strategies, P&G has delivered strong growth over the past decade. It has more than doubled sales, from $38 billion to $79 billion. P&G has delivered core earnings-per-share

growth of 12%, on average, since 2001. And P&G has generated about $70 billion in free cash flow. P&G has a solid foundation for growth. Its strategies are working. Its billion-dollar and half billion-dollar brands are among the strongest in the world. P&G’s core strengths are those that matter most to winning in its industry. P&G’s relationships with retailers, suppliers and innovation partners are enormous sources of competitive advantage. And the leadership team now in place has been carefully groomed through experience and coaching to lead P&G in the decade ahead. P&G is building on a rock-solid foundation of continuity. This is one of P&G’s greatest advantages. From 2009 P&G Annual Report: Ability to Achieve Business Plans We are a consumer products company and rely on continued demand for its brands and products. To achieve business goals, we must develop and sell products that appeal to consumers and retail trade customers. Our continued success is dependent on leading-edge innovation with respect to both products and operations and on the continued positive reputations of our brands. This means we must be able to obtain patents and respond to technological advances and patents granted to competition. Our success is also dependent on effective sales, advertising and marketing programs in an increasingly fragmented media environment. Our ability to innovate and execute in these areas will determine the extent to which we are able to grow existing sales and volume profitably, especially with respect to the product categories and geographic markets (including developing markets) in which we have chosen to focus. There are high levels of competitive activity in the environments in which we operate. To address these challenges, we must respond to competitive factors, including pricing, promotional incentives, trade terms and product initiatives. We must manage each of these factors, as well as maintain mutually beneficial relationships with our key customers, in order to effectively compete and achieve our business plans. As a company that manages a portfolio of consumer brands, our ongoing business model involves a certain level of ongoing acquisition and divestiture activities. We must be able to successfully manage the impacts of these activities, while at the same time delivering against base business objectives. Our success will also depend on our ability to maintain key information technology systems. Cost Pressures Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, cost of labor, foreign exchange and interest rates. Therefore, our success is dependent, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions. We also must manage our debt and currency exposure, especially in certain countries, such as Venezuela, China and India. We need to maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements. We must implement, achieve and sustain cost improvement plans, including our outsourcing projects and those related to general overhead and workforce optimization. Successfully managing these changes, including identifying, developing and retaining key employees, is critical to our success.

Global Economic Conditions Economic changes, terrorist activity and political unrest may result in business interruption, inflation, deflation or decreased demand for our products. Our success will depend, in part, on our ability to manage continued global political and/or economic uncertainty, especially in our significant geographic markets, as well as any political or economic disruption due to terrorist and other hostile activities. Regulatory Environment Changes in laws, regulations and the related interpretations may alter the environment in which we do business. This includes changes in environmental, competitive and product related laws, as well as changes in accounting standards and taxation requirements. Our ability to manage regulatory, tax and legal matters (including product liability, patent, intellectual property, competition law matters and tax policy) and to resolve pending legal matters within current estimates may impact our results.

HOLD • Disciplined cash and cost management • Investing in capacity, innovation, and consumer value this year • 23 $1 billion brands and 20 $500 million brands • Poised to grow in developing markets (low costs, great growth potential) • Excellent consumer understanding, marketing, and brand-building • Global economic conditions • Regulatory environment (environmental, competitive laws) • Currency and debt exposure

Argus Research Company – Hold; Barclays Capital – Overweight/Positive; BOFA Merrill Lynch – Buy; Deutsche Bank North America – Hold; Jefferies & Co. – Buy; JPMorgan – Neutral; Stifel Nicolaus – Buy; Suntrust Robinson Humphrey – Buy.

RECOMMENDATION

PROS TO RECOMMENDATION

CONS TO RECOMMENDATION

ANALYST RECOMMENDATIONS 10

Ratios 2007 2008 2009 Current Industry UN Profitability Net Profit Margin 13.31% 14.25% 17.00% 16.19% 13.10% 8.93% Operating Margin 20.20% 20.50% 20.40% 21.40% 18.80% 12.90% ROE 16.05% 17.83% 20.69% 20.90% 23.70% 31.25% ROA 7.44% 8.44% 9.64% 9.81% 9.42% 9.41% Valuation Price to Earnings 22.2x 16.6x 16.3x 15.9x 16.0x 16.7x Price to Sales 3.1x 2.4x 2.4x 2.3x 1.9x 1.6x Price to Cash Flow 16.1x 14.3x 11.0x 10.5x 11.0x 10.1x Price to Book 3.4x 3.0x 2.6x 2.7x 3.4x 5.4x Debt Utilization LT Debt to Equity 0.36 0.35 0.33 0.35 -0.39 0.63 Financial Leverage 2.11 2.11 2.18 2.04 - 3.10 Liquidity Ratios Current Ratio 0.78 0.79 0.71 0.92 0.79 0.97 Quick Ratio 0.40 0.33 0.34 0.46 0.73 0.61 Asset Utilization Asset Turnover 0.56x 0.59x 0.57x 0.61x 0.67 1.05 DuPont Analysis

Net Profit Margin 13.31% 14.25% 17.00% 16.19% 13.10% 8.93% Asset Turnover 0.56 0.59 0.57 0.61 0.67 1.05 Financial Leverage 2.11 2.11 2.18 2.04 - 3.10 ROE 16.05% 17.83% 20.69% 20.90% 23.70% 31.25%

Profitability Ratios: P&G’s margins are above industry and competitors’ averages. This shows that P&G manages cost very well and will continue to do so with improved cost strategies. However, P&G’s ROE is lower than its competitors. Its ROA is higher but not by much. Liquidity Ratios: The current ratio, which measures a company’s ability to pay short-term obligations, is currently comparable to its competitor, Unilever. Historically, the current ratio for P&G has been around the .8 range and they maintain a high credit rating. They have not struggled to pay off their short-term obligations. The quick ratio measures a company’s ability to meet its short term obligations with its most liquid assets. Once again, the same reasoning for the current ratio applies.

RATIO ANALYSIS 5, 9

DuPont Analysis: DuPont analysis shows the factors that affect return on equity. The asset turnover ratio, which P&G is behind compared to its competitors, weighs down its ROE. Also, the fact that P&G is not as levered as its competitors because it wanted to shore up on cash and keep its high credit rating during this down turn does not help its numbers either. Revenues: I grew revenues in line with analyst recommendations. The 2010 fiscal year should see a slowdown in revenue because of the macro economy and the strategy that management is taking currently. 2010 is supposed to be an investment year, a year where the focus is not on the top line but rather the structure and the focus of the company. For 2010 and 2011, I used estimates from a Deutsche Bank report and used a modest 2.5% growth rate for 2012. I did not foresee any reason to see a large jump in revenues when management has not given any guidance past 2010. Expenses and Discontinued Operations: For the cost of products sold, I kept the margins relatively similar to historical numbers and saw no reason for any changes besides volatility in commodity prices. Management guidance gave a 27.5% tax rate for 2010 and I used that for 2012 while using the Deutsche estimates for 2010 and 2011. The contribution from discontinued operations to income is from the divesture of Folgers. I did not include a contribution in 2011 or 2012. Shares Outstanding: In 2007, Procter & Gamble began to acquire $24-30 billion of outstanding shares under a three year purchase program. The program ends in 2010 but since the total share repurchases to date have not been on track for the announced range, management is considering extending the program, including a $6.0 billion buyback in fiscal 2010. The reduction in 2010, 2011, and 2012 was a mild 2.5%, 2.5% and 1.5%, respectively. Also, the acquisition of Gillette in 2005 was an all-stock acquisition and the repurchasing of those issued shares is continuing as well. Dividends: For 2010-2012, I used dividend estimates from multiple analysts. The dividends I used were $1.89 for 2010, $1.98 for 2011, and $2.10 for 2012. P&G has increased its dividend for 53 consecutive years and I see that continuing for the near future. Changes in Working Capital All changes forecasted based on historical proportions to their common-size ratios. CapEx I used what P&G has historically spent on CapEx and grew this based on previous CapEx growth rates.

PROFORMA ASSUMPTIONS 6, 5, 8, 2

Risk Free Rate I used the EIF risk free rate of 4.5%. Market Risk Premium I used the EIF market risk premium of 5.7%. Beta I have used a beta of 0.60. The regression analysis provided a beta of 0.73 and the average of all estimates besides the regression was 0.59 with a low of 0.53 and high of 0.67. P/E multiples I calculated the averages of analyst estimates for P/E multiples of 14.9x, 15.2x, and 15.8x in 2010, 2011, and 2012, respectively. I used 14.5x, 15.0x, and 15.2x for 2010, 2011, and 2012, respectively. Looking at the historical P/E, the five-year high P/E was 21.5 in 2006. The industry P/E is 16.0 according to CNBC, and P&G is currently right around that number. I can see the P/E sticking around the industry level for the next few years. I believe that the market values P&G’s brand, and that is proven by the continued success of P&G revenues with increases in product prices. I believe 15.2x is an appropriate P/E multiple for 2012. EPS My EPS projections for 2010, 2011, and 2012 are $4.22, $4.01, and $4.26, respectively. My projections are based on net earnings divided by the average diluted shares outstanding. I used Deutsche Bank projected shares outstanding for 2010 and 2011 and used a 1.5% decrease in shares outstanding for 2012 due to the continuance of the share repurchase program.

Model Valuations My CAPM & DDM model resulted in a 7.49% undervaluation. My FCFE model resulted in an 8.49% undervaluation. My PEG/PVGO model resulted in a 1.96% overvaluation.

VALUATION ASSUMPTIONS 6, 5, 7, 2

Sources: 1. Google Finance 2. Fall 2009 Procter & Gamble EIF Report by: Matt Fisser 3. IBIS World 4. The Alacra Store .com 5. The Procter & Gamble Company Annual Report 2009 6. Deutsche Bank 7. Value Line 8. Morningstar 9. CNBC 10. Thomson ONE