Procter & Gamble Earnings: Despite Near-Term Headwinds, We See Unwavering Long-Term Focus as a Plus

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate: $147
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Procter & Gamble’s Earnings

Organic sales edged up 2% in Procter & Gamble PG‘s fiscal first quarter, on the heels of higher prices and a favorable mix, as volumes held flat year over year. Costs related to tariffs and commodities inflated, eating into profits, with the adjusted gross margin contracting 50 basis points to 51.4%.

Why it matters: Even as P&G navigates a challenging landscape, we’re encouraged that it is prioritizing investments in its brands and capabilities rather than chasing short-term volume and market share gains.

• We forecast it to expend 13% of sales annually on research, development, and marketing as it strives to innovate across price tiers in the aisles in which it plays, while also investing 4.3% of sales in capital expenditures (both generally in line with historical levels).
• To combat cost pressures, fuel brand spending, and speed up decision making, we expect P&G to remain stringently focused on extracting inefficiencies (optimizing its supply chain and altering its organizational structure) and rightsizing its portfolio.

The bottom line: Our $147 fair value estimate for wide-moat P&G shouldn’t change much, aside from a modest uptick due to a time-value-of-money benefit, leaving shares in a range we consider fairly valued.

• However, if the stock comes under more pressure on concerns around the global macro and/or competitive environment, we’d recommend this competitively advantaged name.

Coming up: While the outlook for incremental costs stemming from tariffs is now half the level the firm foresaw three months ago ($400 million versus $800 million), the situation remains fluid.

• Beyond the pursuit of cost savings, we expect P&G to continue to surgically raise prices (up 2%-2.5% on average across its mix as of September) to thwart any lasting demise in profitability and to ensure value-enhancing investments aren’t stifled.
• However, we don’t think volumes will plummet, given its judicious emphasis to ensure its products align with evolving consumer trends.