Procter & Gamble Earnings: Sales and Margins Pop, but Competitive and Macro Headwinds Loom
We do not expect significant revisions to our forecast, although we’ll likely tick up our fair value estimate for P&G stock.
Key Morningstar Metrics for Procter & Gamble
- Fair Value Estimate: $136.00
- Morningstar Rating: 2 stars
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
What We Thought of Procter & Gamble’s Earnings
We think the main question heading into Procter & Gamble’s PG first quarter was how volumes fared against increased competition and a cash-stretched consumer. In our view, the strength of the firm’s portfolio and its standing with retailers was evident, as organic sales jumped 7%. Impressively, volumes edged down just 1% on a 7% benefit from higher prices.
Despite weakness in China (around 10% of sales, down 6%), sales on its home turf (about half of sales) shot up 7%. Private label is making inroads, but promotions lag pre-pandemic levels, and management suggested its market share position is generally holding in most categories and geographies. We believe P&G should weather any impending challenges, given that its portfolio is weighted to daily-use essential categories that consumers are unlikely to abandon in any economic climate.
From a profitability perspective, higher prices (a 330-basis-point benefit), a favorable drop in commodity costs (160 basis points), and productivity savings (150 basis points) that were only partially offset by reinvestments in products and packaging drove a whopping 460-basis-point surge in gross margin to 52%. We anticipate the profit boost from pricing and the downdraft in commodities will fade over the next few quarters. However, we expect P&G will continue to invest to support its competitive edge for the long term. Our forecast calls for P&G to direct around 13% of sales to research, development, and marketing on average annually over our explicit forecast.
When taken together, management’s full-year outlook for 4%-5% organic sales growth against 6%-9% EPS growth is unchanged. Thus, we do not expect to make significant revisions to our forecast, although we’ll likely tick up our $136 fair value estimate by $1-$2 per share for time value. After a low-single-digit percentage bump, shares aren’t a bargain, but we suggest investors keep an eye on this wide-moat name for a potential downdraft in the stock price stemming from industry angst.
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