Procter & Gamble Earnings: Brand Reinvestments Buoy Sales Growth and Margins

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate: $138.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Procter & Gamble’s Earnings

Even amid a challenging macroeconomic backdrop, we surmise that Procter & Gamble PG chalked up solid marks last quarter, 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.

From our vantage point, P&G’s performance showcases the prudence of its strategic aims: investing in product innovation and marketing to support its portfolio of daily-use essential offerings. Management’s rhetoric suggests it won’t siphon this spending, which aligns with our forecast for P&G to funnel around 13% of sales to research, development, and marketing on average annually over our explicit forecast. To fund these efforts, we anticipate that the company will continue to scour its business for inefficiencies, most recently with its judicious $1 billion-$1.5 billion restructuring initiative over the next two years to scale back its exposure to noncore markets like Nigeria and Argentina, where returns have suffered macro and fiscal headwinds.

At the halfway point of the year, management edged up its adjusted earnings per share growth outlook to 8%-9% from 6%-9% while holding the line on its organic sales growth target of 4%-5%. We don’t expect to make any meaningful change to our $138 fair value estimate or our long-term forecast (4% annual sales growth and mid-20s operating margins). With a mid-single-digit-percentage bounce in shares on the print, we’d suggest investors remain on the sidelines until a more attractive risk/return opportunity arises, potentially on the heels of stepped-up competitive angst and economic concerns.