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Procter & Gamble Earnings: Muted Sales Growth Doesn’t Reflect a Stained Brand Mix

Though we don’t view the stock as a bargain, we think investors should keep it on their radar.

The Procter & Gamble Co., headquarters building is shown in Cincinnati
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Procter & Gamble Co

Key Morningstar Metrics for Procter & Gamble Company

What We Thought of Procter & Gamble Company’s Earnings

For the first time in more than 20 quarters, Procter & Gamble PG posted just 3% organic sales growth, lagging the mid-to-high-single-digit marks that have 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, as well as essential offerings—should ensure its brands maintain clout with retailers and consumers. We believe the prudence of these aims manifests in the robust 7% growth posted in the firm’s European-focus markets (where volumes increased 4% on 3% higher prices), which have outsize private-label share.

Impressively, consolidated margin gains also ensued, with adjusted gross up 310 basis points to 51.3% and operating margins up 90 basis points to 22.1%. These came despite a 14% bump in quarterly marketing spending. We think P&G will remain laser-focused on unearthing cost savings, reducing overhead, lowering material costs, and increasing manufacturing and marketing efficiency. Beyond boosting profits, we see these initiatives as providing the fuel to invest behind its brands, which we think will persist. We forecast P&G to funnel around 13% of sales to research, development, and marketing on average annually over our forecast.

With the firm’s fiscal year nearing its close, management held the line on its organic sales growth target of 4%-5%, but edged up its adjusted EPS outlook to 10%-11% growth from 8%-9%. As such, we don’t expect to alter our $141 fair value estimate (beyond time value) or our long-term forecast of 4% annual sales growth and mid-20s operating margins. Though we don’t view shares as a bargain, we think investors should keep this wide-moat name on their radar, in case concerns around competition and a weakening macro landscape offer a more attractive entry point.

Procter & Gamble Stock vs. Morningstar Fair Value Estimate

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Erin Lash

Sector Director
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Erin Lash, CFA, is director of consumer sector equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. In addition to leading the sector team, Lash covers packaged food and household and personal care companies.

Before joining Morningstar in 2006, she spent four years as an investment analyst covering retail, transportation, and technology firms for State Farm Insurance.

Lash holds a bachelor’s degree in finance from Bradley University and a master’s degree in business administration, with concentrations in accounting and finance, from the University of Chicago Booth School of Business. She also holds the Chartered Financial Analyst® designation. She ranked second in the food and tobacco industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

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