Upward Sales, but Procter & Gamble Shares No Bargain

Procter & Gamble’s PG run (now at seven consecutive quarters) of mid- to high-single-digit organic top-line gains continued unfettered in its second fiscal quarter. We surmise this performance was more salient when considering the solid comparisons it lapped (4% growth in the prior-year period) and the extent to which this growth has proven broad-based (with four of its five segments boasting underlying sales increases in the 4%-8% range) and balanced (straddling increased volumes and higher prices, up 3% and 2%, respectively). As opposed to evidencing industry tailwinds, we attribute this to intentional actions taken by the firm over a multi-year horizon (including rationalizing its portfolio mix, driving efficiency savings, and funneling additional resources behind its core brand offerings) to reignite its top line and support its brand intangible asset (which when combined with its cost edge underlays its wide moat). However, we’ve been impressed these gains haven’t encumbered profits. As evidence, adjusted gross margins popped 200 basis points in the quarter to 49.6% (reflecting a 120-basis-point benefit from productivity initiatives), while adjusted operating margins ticked up 190 basis points to 22.8% despite a 150-basis-point increase in marketing.

While management edged up its full-year organic sales (to 4%-5% from 3%-5%) and adjusted EPS guidance (to 8%-11% from 5%-10%), we don’t anticipate altering our near-term forecast that continues to align with P&G’s updated marks (at 4.3% and 8.5%, respectively). Further, we’re holding the line on our $106 fair value estimate and long-term expectations (3%-4% annual sales growth and more than 24% operating margins by fiscal 2029, up from an average of 21.6% over the past three years). But trading at nearly a 20% premium to our intrinsic value, we don’t think the shares reflect looming competitive and macro headwinds and tougher second-half comparisons; we believe investors should await a more favorable entry point.

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