Procter & Gamble's Heft Proves Unwavering in Q2

Leading up to wide-moat Procter & Gamble’s PG second-quarter earnings release the overarching question remained anchored in whether it would be able to continue the string of mid- to high-single-digit organic sales marks that have come to characterize the results over the past two and a half years. And in that regard, the firm did not disappoint, posting an 8% underlying sales gain (driven by 5% higher volumes and a 3% benefit from increased prices and favorable mix), a far cry from the low-single-digit levels the business was chalking up just a few short years ago. But we don’t surmise P&G’s top-line momentum is the product of a shift in focus away from driving profitability improvement. P&G also boasted gross and operating margin expansion, up 150 and 250 basis points, respectively, to 53.1% and 27.2%, reflecting the benefit of sales leverage and productivity gains that offset a 7% increase in advertising for its leading brands.

When taken together, management again bumped up its fiscal 2021 outlook, now calling for 5%-6% organic sales growth (from 3%-4% most recently) and core EPS growth of 8%-10% (from 5%-8%), which outpace our 4% and 7% respective pre-print marks. While we intend to amend our near-term forecast in light of its year-to-date performance (which will likely boost our $113 fair value estimate by $1-$2 per share), we don’t expect competitive angst will lay dormant over an extended horizon (as it has since the pandemic took hold). As such, we intend to hold the line on our long-term expectations for 4% annual sales growth and operating margins in the mid-20s (up from the low-20s average the past three years).

And despite this stellar performance, it’s clear expectations have been raised, as shares slumped at a low-single-digit clip on the news. However, given the stock still sits at a mid-teens premium to our assessment of intrinsic value, we’d suggest investors remain on the sidelines until a more favorable risk/reward opportunity arises.

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