Procter & Gamble (PG +0.30%) posted its latest results on Jan. 19, slightly disappointing the market.
In the second quarter of its fiscal 2023, which ended on Dec. 31, the consumer-staples giant saw revenue dip 1% year over year to $20.77 billion, but that still beat analyst estimates by $50 million. Organic sales (which exclude currency fluctuations, acquisitions, and divestments) rose 5%.
Core earnings per share (EPS), which exclude one-time charges, slipped 4% to $1.59 but met analyst expectations. On a generally accepted accounting principles (GAAP) basis, its EPS also declined 4%.
P&G's stock dipped a little after that report, but the stock's 12% decline over the past 12 months still outperformed the S&P 500's 14% drop. Can P&G stay ahead of the market over the next 12 months? Let's find out.
Image source: Getty Images.
A safe-haven stock in a volatile market
P&G owns dozens of iconic brands, like Tide, Pampers, Tampax, Charmin, Bounty, Gillette, Oral-B, Head & Shoulders, and SK-II. The bears once criticized it for owning too many brands, but the company streamlined its business by shrinking its portfolio from about 180 brands in 2014 to just 65 brands today.
P&G's business is resistant to recessions because consumers still buy essential household and personal-care products during economic downturns. That's why its organic sales and core EPS have consistently grown over the past several years.
|
Period |
FY 2018 |
FY 2019 |
FY 2020 |
FY 2021 |
FY 2022 |
|---|---|---|---|---|---|
|
Organic sales growth |
1% |
5% |
6% |
6% |
7% |
|
Core EPS growth |
8% |
7% |
13% |
11% |
3% |
Data source: P&G. (Fiscal year ends in July of the calendar year.) EPS = earnings per share.
It easily withstood the COVID-19 pandemic as consumers stocked up on its products, and it's been countering the inflationary headwinds with gradual price hikes. Unlike many of its smaller and generic competitors, P&G can leverage the strength of its widely recognized brands to raise its prices.
In fiscal 2023, P&G expects its organic sales to rise 4%-5%. It also expects reported revenue to dip 0%-1%, as the strong dollar shaves 5 percentage points off its top-line growth. It expects core EPS to rise 0%-4%, even after absorbing a 26 percentage-point headwind from the strong dollar, elevated commodity prices, and higher freight costs.
P&G expects its North American and enterprise sales to continue rising and sales in China to gradually recover as the country relaxes its "zero COVID" lockdowns. However, it warned that sales in Europe would likely be throttled by the inflationary headwinds, and currency headwinds would remain intense.
Mind its near-term margins
P&G's top-line growth is stable, but its margins are being squeezed by higher inflation, rising supply chain costs, and currency headwinds. After hitting a multi-year high of 51.2% in fiscal 2021, its gross margin dropped to 47.4% in fiscal 2022 and 47.5% in the first half of fiscal 2023. That slight recovery can be attributed to its ongoing price hikes over the past year.
P&G's operating margin also hit a multi-year high of 23.6% in fiscal 2021 but dropped to 22.2% in fiscal 2022 before bouncing back to 23.5% in the first half of fiscal 2023. That recovery can be attributed to cost-cutting measures and improvements to its supply chain. For the full year, analysts expect its operating margin to expand slightly to 22.4%.
P&G's gross and operating margins should remain under pressure for the next 12 months as inflation remains elevated and the Fed continues to boost the dollar's value with additional interest-rate hikes. But that shouldn't matter too much to long-term investors, since P&G's scale gives it the capability to easily weather those cyclical headwinds.
NYSE: PG
Key Data Points
Is P&G still a value stock?
P&G is still an evergreen stock but isn't cheap at 26 times forward earnings. For reference, its peers Kimberly Clark, Colgate-Palmolive, and Unilever trade at 21, 24, and 17 times forward earnings, respectively. P&G's forward dividend yield of 2.5% is also a lot lower than the 10-Year Treasury's 3.4% yield.
P&G's valuation was likely inflated by the flight to safe-haven stocks as the bear market dragged on, so its stock could pull back and underperform the S&P 500 this year if a new bull market starts. I think a new bull market could start this year if inflation is reined in, the Fed eases off its rate hikes, the Chinese market warms up again, and the Russo-Ukrainian conflict is resolved.
Therefore, P&G's stock could remain stagnant in 2023 and underperform the broader market as investors pivot back toward higher-growth plays. However, it could also generate stable long-term returns for conservative investors.
