Procter & Gamble Earnings: Accelerating Sales Growth Evidences Prudence of Strategic Course

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate
  : $155.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Low

What We Thought of Procter & Gamble’s Earnings

Procter & Gamble PG reported 4.0% organic sales growth in the first quarter, driven by a 2.4% volume increase and a 1.6% aggregate benefit from higher prices and a favorable mix. However, cost savings couldn’t offset inflationary pressure, so adjusted gross margin fell 150 basis points to 49.8%.

Why it matters: Amid intense competition and geopolitical uncertainty, P&G is investing judiciously in its brands and capabilities. This is reflected in improved marks in its two largest markets: the US (up 3%, versus down 1% in the fourth quarter) and China (8% growth, up from 4%).

• Innovation is giving P&G license to raise prices to offset unrelenting inflation partially (5% headwind in the quarter, with expectations for an 8% full-year hit). We expect management to continue prioritizing keeping its products aligned with evolving consumer trends.
• Specifically, we forecast P&G to direct 13% of sales ($14 billion) to research, development, and marketing and 4%-5% of sales ($4.5 billion) to capital expenditures annually through fiscal 2036.

The bottom line: We aren’t changing our $155 per share fair value estimate for wide-moat Procter & Gamble. Shares bounced more than 5% on Oct. 22, making the stock a bit heated.

• However, if shares pull back on global macro and/or competitive concerns, we’d recommend investors add this competitively advantaged name to their shopping carts.

Between the lines: In our view, the recently completed tie-up with premium supplement manufacturer Thorne HealthTech (for around $4 billion) does not suggest P&G hungers to be a consolidator (at less than 1% of sales).

• Rather, we believe returning cash to shareholders will continue to take top billing. Our Standard Morningstar Capital Allocation Rating holds.

Coming up: At P&G’s upcoming investor event (Nov. 19), we expect more details on its current supply chain initiatives, which have become instrumental in helping the firm blunt cost angst while simultaneously fueling brand investments.