Procter & Gamble Earnings: Sales Trend Higher on Continued Brand Spending

Key Morningstar Metrics for Procter & Gamble

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

What We Thought of Procter & Gamble’s Earnings

Procter & Gamble PG posted a 3% rise in organic sales on a 2% bump in volumes and a 1% benefit from favorable mix. However, margins contracted, with the firm’s adjusted gross margin down 30 basis points to 52.4% and its adjusted operating margin off 80 basis points to 26.2%.

Why it matters: Even in the face of macro, geopolitical, and competitive headwinds, P&G continues to invest in consumer-valued innovation and marketing to ensure its products win at the shelf for retailers and consumers.

• We don’t expect P&G will divert from this course, as we forecast it will funnel 13% of sales (more than $13 billion annually) on average annually to R&D and marketing over our 10-year forecast.
• To fund investments in its brands and capabilities, we expect P&G will scour the business to drive savings by reducing overhead, lowering material costs, and increasing productivity.

The bottom line: Our fair value estimate of $143 per share P&G holds, as results through the first half of the fiscal year and guidance continue to align with our full-year outlook for 3.6% organic sales growth, and nearly 6% growth in adjusted earnings per share.

• While shares look heated, trading 20% above our valuation, we think this name should remain on investors’ radars to the extent angst around competition and a waning macro landscape dent the share price.

Between the lines: The tide appears to be turning for P&G in its second-largest market, China (10% of sales by our estimate), where organic sales slipped a mere 3% in the quarter—a far cry from the 15% decline chalked up in the prior quarter.

• The gains were particularly notable in its premium skincare brand, SK-II, which boasted 5% organic sales growth, versus a 20% retreat in the first fiscal quarter.
• We attribute this improvement to diligent investments behind its brands and capabilities supporting its competitive position and brand prowess, despite tepid consumer confidence and anti-Japanese sentiment around SK-II.