Global consumer packaged-goods giant Procter & Gamble (PG +0.10%) will report first-quarter fiscal 2022 earnings on Tuesday, Oct. 19. The company is coming off a solid year in fiscal 2021 when consumers who were spending more time at home bought more of its products.
Fiscal 2022 will bring new challenges as well as some of the same from 2021. The world is cautiously learning to live with the presence of COVID-19, and economies are emerging from lockdowns in phases. Throughout the pandemic, consumer demand has increased and remained elevated while supply chains were negatively affected. P&G's ability to deal with these bottlenecks is the primary issue investors should focus on in its upcoming report.
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Procter & Gamble is facing inflation head on
Management sounded optimistic heading into the current quarter. Here's what it said in its July 30th press release:
We delivered another year of strong results with balanced top and bottom-line growth and strong cash generation, exceeding each of our in-going targets. We built strong momentum prior to the pandemic and have strengthened our position further. As we look forward to fiscal 2022, we expect to continue to grow top-line and bottom-line and to deliver another year of strong cash return to shareholders despite a challenging cost and operating environment.
Indeed, the company is guiding investors to look for revenue growth of approximately 3% and earnings-per-share growth of 7.5% in fiscal 2022. The expected revenue growth is better than the negative 0.6% compound annual growth it delivered over the past decade. And the EPS growth will be impressive considering the rising costs throughout world economies.
In fact, management is estimating that rising commodity and freight expenses will cost the company $1.9 billion in 2022. Procter & Gamble's sales were $76 billion in 2021, so $1.9 billion is not an insignificant sum. Interestingly, the company went through 2021 with few price increases instituted across its portfolio of products. Even in its most recent quarter, the company's overall price increase was just 1% from the same period last year.
Look for the pace of those price increases to accelerate, starting with this quarter's report on Oct. 19. The company has already signaled it would be raising prices in the hope that competitors will also raise prices and it does not lose market share. It remains to be seen how that market share evolves as the inflationary pressures hit P&G and its competitors. My early estimate is that consumers will bear the brunt of higher costs as most companies will choose to raise prices.
Procter & Gamble is trading at a fair valuation
So what does this all mean for results in the current quarter? Right now, analysts on Wall Street expect Procter & Gamble to report revenue of $19.8 billion and earnings per share of $1.58. If the company hits those estimates, it would mark an 8% increase in revenue from last year but a 3% decline in earnings per share. That is not such a concern since rising costs are hitting the company earlier in the year while the benefits of price increases on its products will help later.
As for P&G shares, they are presently trading at a price-to-earnings ratio of 25, right around their historical average. So in my view, there is no need for investors to buy the stock ahead of earnings. Wait for the results to come out, digest the latest information, and then make a decision.
