P&G Sales Bounce, Shares Cheap
Four of the wide-moat firm's five segments boasted sales gains in the mid- to high-single-digit range in the first quarter.
Across the consumer products sector, much angst has centered on the ability of firms to reignite sales and offset inflationary headwinds, and Procter & Gamble (PG) is no exception. However, if first-quarter results are any indication (organic sales jumped 4%), P&G could be setting out on a new course in fiscal 2019. Growth was broad-based, with four of the firm’s five segments boasting sales gains in the mid- to high-single-digit range, an impressive feat given the intense competitive landscape. The one laggard remains its baby and family care segment (one quarter of sales), where underlying sales slipped 1%. However, management qualitatively discussed that this downdraft was concentrated within the mid- and value-tier categories, which offset growth of its premium offerings (where P&G has been expanding its reach with new products). As such, we haven’t wavered from our thinking that actions over the past several years to cull more than 100 brands and funnel resources to fund on-trend product launches may be positioning P&G to more effectively and efficiently respond to evolving consumer trends.
Despite this, we’ve never thought sustainable sales gains at P&G would chart a straight path north, particularly against an industry backdrop of tepid pricing and competitive pressures, but we believe this performance is evidence that P&G is investing to support the brand intangible assets that underpin its wide moat. We intend to incorporate a slightly larger hit to sales and profits from unfavorable foreign exchange in the current year (now anticipated to be a drag of 3%-4%, down from around 2% prior), but don’t see a change to our $97 fair value estimate, which is based on 3%-4% annual sales growth in the longer term and 300 basis points of operating margin expansion to nearly 25% at the end of our explicit forecast. Even after accounting for the high-single-digit rise in shares, we view the stock as undervalued, trading at around a 10% discount to our valuation.
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Erin Lash, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.