Procter & Gamble Earnings: Even Amid Global Macro Pressures, Sales and Margins Edge Higher

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate: $143.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of Procter & Gamble’s Earnings

Organic sales growth remained tepid, increasing just 2% during Procter & Gamble’s PG fiscal first quarter, reflecting a 1-percentage-point contribution from both price and volumes. But this is a far cry from the mid-to-high-single-digit-percentage gains the business has boasted over the past few years.

Why it matters: Despite this, we see P&G’s strategic aims—spending behind its brands and capabilities to ensure its acclaim with retailers and consumers persists—as a prudent means to buoy its brand strength in the longer term.

• We forecast P&G to funnel 13% of sales (nearly $14 billion annually) into research, development, and marketing over our forecast.
• To fund these investments, we think P&G will scour the business to unlock efficiencies. This proved a 230-basis-point benefit to adjusted operating margins in the quarter (with inflation and brand spending serving as offsets), with margins up 30 basis points to 26.7%.

The bottom line: Our fair value estimate of $143 per share and long-term forecast (nearly 4% annual revenue growth and mid-20s operating margins) stand.

• Although overvalued now, trading at a 20% premium to our valuation, we think investors should keep an eye on this wide-moat name if angst around competition and a slumping macro landscape dent the share price.

Between the lines: A lackluster consumer spending backdrop in China (a high-single-digit percentage of sales) continues to be a blemish. This is particularly evident with P&G’s premium SK-II brand, which posted a drop in sales of over 20%. But management tried to emphatically downplay such concerns.

• P&G hasn’t ceased investing in consumer-valued innovation and marketing to support its brand health, which we think will boost sales in the region in time.
• While the consolidated beauty business (nearly 20% of sales) slipped 2% in the quarter on weakness in China, there was outsized expansion in segment sales in North America (up 8%) and Europe (up 6%), which we attribute to the prowess of its leading brand mix.