We're pleased to see P&G shares pop on solid quarterly earnings. But don't chase the rally

Published Tue, Jan 23 20243:16 PM EST

Procter & Gamble shares jumped more than 4% on Tuesday following better-than-expected quarterly earnings that were released before the opening bell. While sales missed the mark, profitability was solid, excluding charges related to writing down the value of Gillette and non-core restructuring measures. P & G raised the low end of their full-year EPS guide. Sales in the three months ended Dec. 31 increased 3% year over year to $21.44 billion, short versus the $21.48 billion expected by analysts, according to data provider LSEG. Adjusted earnings per share rose nearly 16% to $1.84, topping analyst forecasts of $1.70. PG 1Y mountain Procter & Gamble 1 year Given the consumer products giant's strong profitability and cash flow, we're reiterating our $168-per-share price target. However, we're downgrading shares from our buy-equivalent 1 rating to a 2 rating , which means we would wait for a pullback before considering buying more. The downgrade also reflects Tuesday's sharp increase in a muted overall market, which is uncharacteristic of this particular stock and therefore should not be chased. Bottom line Procter & Gamble delivered a solid quarter as a 4% increase in the prices it charges for its products proved to have minimal impact on the volumes – unchanged on a reported basis and down only 1% organically. Volume levels are a key watch item that we called out in Saturday's preview commentary . The organic volume decline came as weakness in Greater China, Eastern Europe, the Middle East, and Africa offset strength in North America and Europe's main markets. P & G's brands include household names from Crest toothpaste to Pampers diapers to Tide laundry detergent to Gillette to Vicks cold and flu products. Organic sales grew 4% in the quarter. That screens as a slight miss. However, a note from Citi said that buy-side expectations were tracking more in the 3% to 4% range. So, technically a miss – but in reality, likely in line to better than expectations as far as investors are concerned. Leveraging product innovation that provides strong pricing power, Procter & Gamble was able to deliver on an adjusted basis strong profit margin expansion and better-than-expected gross, operating, and pre-tax income despite the top-line sales miss. Cash flow generation was also better than expected with free cash flow amounting to 95% of adjusted net income. We watch the free-cash-flow-productivity metric because earnings backed by cash are considered to be better quality than those based more on accounting dynamics. P & G repurchased $1 billion worth of common stock and paid out $2.3 billion in dividends in fiscal Q2. At current stock prices, the company pays annual dividend yield of roughly 3.75%. Guidance In addition to the positive dynamics in P & G's fiscal second quarter, management raised the lower end of their full-year earnings guidance. Management is now targeting fiscal year 2024 core earnings, which exclude one-time items, in the range of $6.37 to $6.43 per share – up 8% to 9% on a core basis. That's up from the prior range of $6.25 to $6.43 and represents a 6-cent increase at the midpoint to $6.40. That's still a tad below the $6.42 estimate but represents movement in a positive direction. Aiding the upward earnings guidance revision, the team now expects net interest expense be a roughly $100 million after-tax earnings headwind, better than the $200 million headwind they were expecting when the company reported first-quarter results. For the full year, the overall sales growth rate was reiterated at 2% to 4% as was the organic growth target of 4% to 5%. The expected foreign exchange headwind to sales of 1% to 2% was also reiterated. The currency impact is expected to result in a $1 billion hit after taxes in fiscal 2024, only partially offset by the unchanged $800 million benefit management expects to realize on lower commodity costs for the full fiscal year. On the post-earnings call, management said they're on track to deliver at the higher end of their core EPS and organic sales guidance ranges. Quarterly commentary As we can see in the earnings table, what Procter & Gamble failed to deliver on the top line, they more than made up for in a lower cost of sales of $10.14 billion, which declined enough to offset higher adjusted selling, general and administrative (SG & A) expenses of $5.51 billion. As a result, we got across the board better than expected profitability results on a companywide basis — both in absolute terms and as far as profit margins are concerned. Under the Product Segments heading, all the year-over-year gains were to levels that fell short of estimates, except for Fabric Care & Home Care. Beauty's 1% increase to $3.85 billion was a pretty big miss. Skip down to the Organic Sales growth, the only line time that beat was Grooming. Geographical breakdown Regarding geographic dynamics, North America continues to improve as the last five quarters have seen volumes rebound from down 3% in the fiscal 2023 second quarter to up 4% in the reported quarter. China, on the other hand, remains problematic for the time being as organic sales declined 15% despite underlying market growth only deteriorating in a mid- to high-single-digits range. Driving that weakness was a 34% decline in the SK-II luxury skincare line due to some pushback in China on Japanese brands. That said, management noted on the call that "consumer research indicates SK-II brand sentiment is improving and we expect to see sequential improvement in the back half" of their fiscal year. Nonetheless, management remains positive on the Chinese market opportunity and see growth returning to a mid-single-digit rate over time. (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Boxes of Crest toothpaste, owned by the P&G, are seen on a store shelf on Oct. 20, 2020 in Miami.

Joe Raedle | Getty Images