Procter & Gamble Earnings: Margins Rebuild Even as Investments Persist

Procter & Gamble Stock at a Glance

• Fair Value Estimate: $129.00
• Morningstar Rating: 2 stars
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide

Procter & Gamble Earnings Update

We think the main question coming into Procter & Gamble’s PG fourth quarter was whether the firm would squeeze out more gains from its gross margin line, and the company didn’t disappoint. The combination of higher prices (a 340-basis-point benefit) and productivity savings (290 basis points) drove a massive 380-basis-point jump in P&G’s fourth-quarter gross margin to 48.4% (partially offset by higher material costs and reinvestments made in products and packaging).

While the absolute margin level still lags the low-50s that have historically characterized the business, this gain was a sequential acceleration from the 150-basis-point bump in its third fiscal quarter. We surmise that P&G will continue to employ multiple levers (raising prices, extracting costs, and altering price/packs) to return margins to historic marks by fiscal 2025.

Importantly, this profit expansion didn’t come at the expense of sales growth, with organic sales up 8% in the quarter, as 7% higher prices and a 2% benefit from a favorable mix were only partially offset by a 1% downdraft in volumes.

Concerning continued growth in both the top and bottom lines, we’re encouraged that P&G remains committed to funneling resources back into the business in the form of research, development, and marketing, which we see as supportive of its wide moat. And we don’t think it will shirk here, with our forecast calling for P&G to direct around 13% of sales to these areas on average annually over our explicit forecast.

Together, the firm’s fiscal 2023 results and fiscal 2024 guidance (4%-5% organic sales growth against 6%-9% earnings per share growth) modestly outpace our preprint estimates, and we’ll likely move our near-term forecast to within the guided ranges. When combined with a time value benefit, we’ll likely hike our $129 fair value estimate by a mid-single-digit percentage, but its shares don’t strike us as attractive, trading at around a 15% premium to our intrinsic valuation.