P&G stock gets the respect it deserves after delivering a great quarter and outlook

Published Fri, Apr 21 20233:30 PM EDT

Club holding Procter & Gamble (PG) reported fiscal third-quarter results that were better than expectations before the opening bell Friday. And, shares of the maker of Gillette and other daily use household products got a much-deserved boost. Sales of $20.07 billion came in ahead of expectations, increasing 4% from the year-ago period. Adjusted earnings-per-share (EPS) of $1.37 outpaced consensus estimates, representing annual growth of 3%. Excluding a 31-cent per-share foreign exchange hit, EPS rose 13% year-over-year on a currency-neutral basis. During fiscal Q3, management also returned $3.6 billion to shareholders via dividends and buybacks. Last week, P & G announced a 3% dividend hike, representing the 67th consecutive annual dividend increase and the 133rd consecutive year that P & G has paid out a dividend. Bottom line While challenges remain, P & G put up a great quarter characterized by improving profit margins on the back of easing input cost pressures and productivity enhancements. The strong results were also met with a rise in management's full-year organic sales growth forecast and an increase to the bottom end of their planned share repurchase goals for the year. Volumes were down 3% (down 2% when excluding the impact of portfolio reductions in Russia), but that was a sequential improvement compared to the 6% decline we saw in the prior quarter. The fact that volumes were only down 3%, despite a 10% price increase, is a testament to Procter & Gamble's strong pricing power. (Remember, value isn't about offering the lowest price, it's about offering the greatest bang for the consumer's buck). That's where P & G shines, product superiority. It's why the team was able to tell investors on the earnings call that they "don't see any material trade down" in the U.S. (The term "trade down" means seeking out similar products for less money). All in, we got 7% organic revenue growth in the quarter, nearly double what analysts were expecting. While some of that is being masked by the current operating environment, the underlying results point to a leaner, more profitable Procter & Gamble, thanks to strong execution on the part of management in addressing rising input costs. Productivity enhancements made thus far have been offset by input cost inflation. However, we expect the benefits of these enhancements to become more apparent when the operating environment begins to normalize. Put another way, as we come out of this recent bout of decades-high inflation, we are looking at a leaner, more profitable Procter & Gamble and believe that full impact of changes made over the past year will become more apparent as difficult comps are lapped and the operating environment begins to normalize. A name like P & G, which is one of the 30 components of the Dow Jones Industrial Average , is exactly where investors want to be against the backdrop of macroeconomic uncertainty given the resilient nature of the company's portfolio. Put another way, you're going to cut a lot of other discretionary expenses before you start thinking about giving up on hygiene. Additionally, you're getting the structural improvements aiding overall profitability and therefore working to drive shares higher. The stock, which rose nearly 4% on Friday, has been heading higher — up some 12% in the past seven weeks or so. Given the strong quarter, we are bumping up our Club price target on P & G shares to $168. However, we're maintaining our 2 rating for the time being as it's not our style to chase a strong run like the one shares have been on since bottoming last month. We plan to continue to monitor the name and look for a better opportunity to upgrade. PG YTD mountain Procter & Gamble YTD performance Guidance In addition to the strong results, management raised their forecast for full-year organic sales growth, now expecting growth of 6%, up from the previously provided 4% to 5% range. This new target comes as management now expects all-in (non-organic) sales growth to be up 1%, an increase from the down 1% to flat range previously provided. Foreign exchange is still expected to be a 5 percentage point headwind. As for earnings, management reiterated their prior outlook for flat to up 4% versus full-year 2022's $5.81 earnings result, which at the $5.93 midpoint is ahead of the $5.83 the Street was modeling into the print. Incorporated into this forecast is a $1.40 per share headwind resulting from a combination of unfavorable foreign exchange rates and elevated commodity and material costs. That $1.40 per share headwind is an improvement from the $1.50 per share headwind previously expected as a greater foreign exchange headwind than was previously expected, is being more than offset by an improvement in the outlook for commodity and freight costs. However, despite the easing headwinds, management remains cautious and reiterated their expectations for earnings to come in at the lower end of the provided range, adding the view reflects "intent to remain fully invested to drive [their] superiority strategy and increase investments as value-creating opportunities are available." We believe that by keeping expectations to the lower end of the range the team is granting themselves flexibility in terms of investment opportunities while setting up the potential for an "under promise, over deliver" situation to close out the fiscal year. The team continues to expect adjusted free cash flow productivity of 90% and to pay around $9 billion in dividends. However, another bright spot, the team raised the low end of their planned buyback activity for the full year, now targeting a range of $7.4 billion to $8 billion, up from the $6 billion to $8 billion range previously provided. Procter & Gamble's fiscal Q3 organic sales growth of 7% (seen in the third section of the above table near the bottom) was driven by a 10% increase in pricing and a 1% benefit from an improved sales mix — a greater market share of more profitable categories. However, partially offsetting the strong price dynamic and mix benefit was a 3% decline in overall sales volume. On the call, management also noted that organic sales were up in all 10 product categories and in six of the company's seven geographic regions. "Greater China organic sales were up 2% versus the prior year as the market begins to recover from Covid lockdowns and as consumer confidence improves," the team said. As mobility in the region improves, they expect a further recovery in the coming quarters and longer term. They see China returning to mid- to single-digit percentage underlying market growth rates. Global aggregate market share held steady during the quarter. Regarding profit margins, the 40-basis-point annual expansion we see in P & G's operating margin came as a result of the 150-basis-point gross margin expansion. (Those margins can be seen in the above table in the "companywide numbers" section.) The operating margin expansion was partially offset by higher selling, general, and administrative expenses (SG & A) and inflationary impacts. Notably, the team said that on a currency-neutral basis, the operating margin expanded 160 basis points with gross productivity savings called out as a 290-basis-point help to the operating margin in the quarter. We mention this because it highlights the improving underlying profitability of the company that is being partially masked by inflation and speaks to the strong execution of management efficiency initiatives. (Jim Cramer's Charitable Trust is long PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Gillette razors, a brand owned by Procter & Gamble, is seen for sale in a store in Manhattan, New York City, U.S., June 29, 2022.

Andrew Kelly | Reuters