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Here's Why You Should Hold on to Procter & Gamble (PG) Now

The Procter & Gamble Company PG has been gaining from robust pricing, segmental strength and improved productivity for a while. This led to better-than-expected top and bottom lines in first-quarter fiscal 2023. PG reported net sales of $20,612 million, increasing 1% year over year.

On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 7%, backed by a 9% rise in pricing and a 1% gain from a positive product mix, offset by a 3% decline in volume. All the company’s business segments reported growth in organic sales. Organic sales rose 4% for Beauty, 5% for Grooming, 8% each for Fabric & Home Care, and Health Care segments, and 6% for the Baby, Feminine & Family Care segment.

Procter & Gamble is focused on productivity and cost-saving plans to boost margins. Continued investment in business, and efforts to offset macro cost headwinds and balance top and bottom-line growth underscore its productivity efforts. PG is witnessing cost savings and efficiency improvements across all facets of its business.

As a result, it expects $800 million worth COGS savings this year. PG’s core currency-neutral gross margin reflected a 100-bps gain from productivity savings in first-quarter fiscal 2023. On a currency-neutral basis, the operating margin expanded 10 bps to 24.8%, driven by gross productivity savings of 230 bps.

Driven by these factors, management anticipates organic sales growth of 3-5% in fiscal 2023. In the past three months, shares of this presently Zacks Rank #3 (Hold) stock have gained 3.7% compared with the industry’s growth of 3.6%.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Despite these upsides, Procter & Gamble has been witnessing supply-chain issues, higher transportation costs, geopolitical challenges, currency headwinds and rising inflation of late, which are hurting consumer confidence. PG anticipates all-in sales between down 3% and down 1% from the last fiscal year’s level for fiscal 2023 compared with flat to up 2% sales growth expected earlier.

Currency movements are expected to negatively impact all-in sales growth 6% compared with the 3% impact projected earlier. Management expects reported EPS to be at the lower end of flat to up 4% due to the increased adverse currency impacts.

Additionally, higher commodity and freight costs dented margins in the fiscal first quarter. In first-quarter fiscal 2023, Procter & Gamble’s gross margin contracted 160 basis points (bps) to 47.4%. The currency-neutral gross margin declined 130 bps to 47.7%. The decline in the gross margin was mainly due to a 510-bps commodity and input material cost inflation, reflecting a 40-bps increase in freight costs, a 130-bps negative product mix and other impacts, and a 30-bps headwind from product and packaging investments. Also, the operating margin declined 70 bps from the prior fiscal-year level to 24%. Consequently, core earnings of $1.57 per share declined 2% from $1.61 in the year-ago fiscal quarter.

Procter & Gamble’s fiscal 2023 earnings view considers after-tax impacts of $1.3 billion related to unfavorable currency movements, a $2.4-billion impact of higher commodity and material costs, and a $200-million impact from higher freight costs. This equates to a $3.9-billion after-tax impact on net income, implying a $1.57-per-share impact on EPS or a 23-percentage-point impact on EPS growth. The revised $3.9-billion headwinds mark a $600-million increase from management’s prior view of $3.3 billion.

Conclusion

Despite cost headwinds and rising inflation, solid demand, brand strength and productivity efforts bode well and will likely help PG stay afloat. Also, a long-term earnings growth rate of 6% raises optimism on the stock.

Stocks to Consider

We highlighted some better-ranked stocks from the broader Consumer Staples space, namely Coca-Cola FEMSA KOF, e.l.f. Beauty ELF and TreeHouse Foods THS.

Coca-Cola FEMSA currently flaunts a Zacks Rank #1 (Strong Buy). KOF has a trailing four-quarter earnings surprise of 26%, on average. It has a long-term earnings growth rate of 10.3%. The stock has gained 7.7% in the past three months.

You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Coca-Cola FEMSA’s current financial-year sales and earnings per share suggests growth of 15.6% and 6.2%, respectively, from the comparable year-ago reported numbers. The consensus mark for KOF’s earnings per share has moved up 9.8% in the past seven days.

e.l.f. Beauty currently sports a Zacks Rank of 1. ELF has a trailing four-quarter earnings surprise of 77%, on average. The stock has rallied 29% in the past three months.

The Zacks Consensus Estimate for e.l.f. Beauty’s current financial-year sales and earnings suggests growth of 17.6% and 8.3%, respectively, from the corresponding prior-year reported numbers. The consensus mark for ELF’s earnings per share has moved up a penny in the past seven days.

TreeHouse Foods, manufacturing and distributing private-label foods and beverages, carries a Zacks Rank #2 (Buy) at present. THS has a trailing four-quarter earnings surprise of 56.3%, on average.

The Zacks Consensus Estimate for THS’ current financial-year sales and EPS suggests a decline of 19.2% and 12.6%, respectively, from the corresponding year-ago reported numbers.

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Procter & Gamble Company The (PG) : Free Stock Analysis Report

Coca Cola Femsa S.A.B. de C.V. (KOF) : Free Stock Analysis Report

TreeHouse Foods, Inc. (THS) : Free Stock Analysis Report

e.l.f. Beauty (ELF) : Free Stock Analysis Report

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Zacks Investment Research