Company Reports

For the first time in more than 20 quarters, Procter & Gamble posted just 3% organic sales growth in its third fiscal quarter, lagging the mid- to high-single-digit marks that have more recently characterized the business, primarily on the heels of less price contribution (3%, down from 7% in the first quarter). However, we don’t believe this suggests cracks in the firm’s competitive prowess. After rightsizing its category and geographic reach by shedding around 100 brands about 10 years ago, P&G also embraced a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers its retail partners and end consumers). In this context, we think P&G’s strategic aims—investing in product innovation and marketing to support its portfolio of daily use, essential offerings—should ensure its brands maintain clout with retailers and consumers, ultimately supporting its wide moat over the long term.

For the first time in more than 20 quarters, Procter & Gamble posted just 3% organic sales growth, lagging the mid- to high-single-digit marks that have more recently characterized the business, primarily on the heels of less price contribution (3%, down from 7% in the first quarter). However, we don’t believe this signals cracks in the firm’s competitive prowess. From where we sit, P&G’s strategic aims—investing in product innovation and marketing to support its portfolio of daily use, essential offerings—should ensure its brands maintain clout with retailers and consumers. We believe the prudence of these aims manifest in the robust 7% growth posted in its European focus markets—where volumes increased 4% on 3% higher prices—a market with outsize private-label share.

It wasn’t long ago that Procter & Gamble was dogged by lackluster sales growth. However, after posting its 22nd consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we acknowledge the firm was a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on nearly 10 years ago (rightsizing its category and geographic reach by shedding around 100 brands to ensure its resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers its retail partners and end consumers) that we think should support its wide moat over the long term.

Even amid a challenging macroeconomic backdrop, we surmise wide-moat Procter & Gamble chalked up solid second-quarter marks, including 4% organic sales growth, 520 basis points of gross margin expansion to 52.7%, and 400 basis points of adjusted operating margin gains to 27%. The U.S. (about half its total sales base) and Europe focus markets (we estimate 15%-20% of sales) were particular standouts, recording 5% and 7% organic sales growth, respectively, on 4% and 3% volume gains.

It wasn’t long ago that Procter & Gamble was dogged by lackluster sales growth. However, after posting its 21st consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we acknowledge the firm was a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on about nine years ago (rightsizing its category and geographic reach by shedding around 100 brands to ensure its resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers its retail partners and end consumers) that we think should support its wide moat over the long term.

We think the main question heading into Procter & Gamble’s first quarter was how volumes fared against increased competition and a cash-stretched consumer. And in our view, the strength of its portfolio and standing with retailers was evident, as organic sales jumped 7%. Impressively, volumes edged down just 1% on a 7% benefit from higher prices.

It wasn’t long ago that Procter & Gamble was dogged by lackluster sales growth. However, after posting its 20th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we acknowledge the firm has been a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on about nine years ago (rightsizing its category and geographic reach by shedding around 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.

We think the main question coming into Procter & Gamble’s fourth quarter was whether the firm would be able to squeeze out more gains from its gross margin line, and on this mark, the company didn’t disappoint. The combination of higher prices (a 340-basis-point benefit) and productivity savings (290 basis points) drove a massive 380-basis-point jump in P&G’s fourth-quarter gross margin to 48.4% (partially offset by higher material costs and reinvestments made in products and packaging). While the absolute margin level still lags the low-50s that have historically characterized the business, this gain was a sequential acceleration from the 150-basis-point bump in its third fiscal quarter. And we surmise that P&G will continue to employ multiple levers (raising prices, extracting costs, and altering price/packs) to return margins to historic marks by fiscal 2025.

It wasn’t long ago that Procter & Gamble was dogged by lackluster sales growth. However, after posting its 19th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we acknowledge the firm has been a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on about nine years ago (rightsizing its category and geographic reach by shedding around 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.

Up to this point, gross margin expansion has proven elusive across the consumer products arena for more than a year, but wide-moat Procter & Gamble bucked the trend in its fiscal third quarter with an increase of 150 basis points (to 48.2%) while also boasting 7% growth in organic sales (as a 10% price bump was partially offset by a modest 3% shortfall in volumes). Management alluded to moderating freight costs, but inflationary headwinds persist (serving as a 270-basis-point drag to the gross margin).

It wasn’t long ago that Procter & Gamble was dogged by lackluster sales growth. However, after posting its 18th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we acknowledge the firm has been a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on just nearly nine years ago (rightsizing its category and geographic reach by shedding around 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.

While we believe Procter & Gamble’s second-quarter results (5% organic sales growth and modest degradation in gross and operating margins) suggest it's withstanding macro and competitive challenges quite well, we are less sanguine on shares at current levels. With six months in the rearview, we see little to warrant altering our near- or long-term outlooks for the business, but our $125 fair value estimate should see a low-single-digit bump on time value. Shares trade at a 15%-20% premium to our intrinsic valuation, but if a more attractive entry point comes to fruition (likely on economic concerns), we’d be eager buyers.

We came away from Procter & Gamble's investor event, held in Cincinnati on Nov. 17, with conviction that the company should maintain its competitive prowess even as it battles a weakening macro backdrop. Over the past eight years, management has taken a more holistic approach to brand investments—how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers to its retail partners and end consumers. We don’t think it is content with recent gains, including an impressive 17 consecutive quarters of mid- to high-single-digit organic sales growth.

It wasn’t long ago that Procter & Gamble was dogged by lackluster sales growth.However, after posting its 17th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we recognize the firm has been a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on just more than eight years ago (rightsizing its category and geographic reach by shedding around 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.

After wading through its first-quarter results, we don't anticipate a material change to our $126 fair value estimate for wide-moat Procter & Gamble, as a sizable decay in near-term sales on unfavorable foreign exchange and the positive impact of time value largely offset. Shares strike us as fairly valued at present (even considering the low-single-digit percentage bump on the print), but we suggest investors keep an eye on this competitively advantaged name for a potential downdraft in the stock price related to industry angst.

It wasn’t long ago that Procter & Gamble was dogged for lackluster sales growth; however, after posting its 16th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we recognize the firm has been a beneficiary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on about eight years ago (rightsizing its category and geographic reach by shedding more than 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.

From our vantage point, Procter & Gamble’s fourth-quarter results (7% organic sales growth and a 30-basis-point adjusted operating margin erosion to 18.4%) evidence it is astutely navigating the current uncertain landscape. However, the market doesn’t seem to share our stance, as shares sank 5% on the print. We think this reaction was driven by the cautious tone management struck as it relates to consumer spending (in light of rising interest rates and higher prices at the grocery store and the pump) and inflation (pegged at a $2.4 billion incremental headwind, on top of $3.2 billion in fiscal 2022).

It wasn’t long ago that Procter & Gamble was dogged for lackluster sales growth; however, after posting its 15th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we recognize the firm has been a beneficary of the pandemic (with a mix that caters to consumers' penchant for cleaning and disinfecting fare), we attribute these marks to the strategic course P&G embarked on about eight years ago (rightsizing its category and geographic reach by shedding more than 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.

Third-quarter results once again reflect the prudence of wide-moat Procter & Gamble’s decision eight years ago to tilt its portfolio more toward daily use, essential categories. Organic sales shot up 10%, on top of a 4% gain last year. And despite a stout 5% contribution from higher prices, volumes held up quite well, benefiting sales to the tune of 3% (with favorable mix also aiding sales by 2%). Even as consumers have been digesting higher prices at the shelf seamlessly thus far, we’re cognizant the combination of skyrocketing prices throughout the grocery store, rising gas prices, and mounting interest rates (among other factors) could ultimately prompt trade down to lower-priced alternatives.

It wasn’t long ago that Procter & Gamble was dogged for lackluster sales growth; however, after posting its 14th consecutive quarter of at least mid-single-digit organic revenue growth, these concerns are a distant memory. While we recognize the firm has been a beneficary of the pandemic (given its outsize focus on cleaning and disinfecting), we attribute these marks to the strategic course P&G embarked on more than seven years ago (rightsizing its category and geographic reach by shedding more than 100 brands to ensure resources were being effectively allocated to the highest-return opportunities, while maintaining a stringent focus on costs). As a part of this playbook, P&G also adopted a more holistic approach to brand investing across its business (consisting of how a product performs, the packaging, brand messaging, execution in stores and online, and the value a product offers for its retail partners and end consumers) that we think should support its wide moat long term.