Procter & Gamble Remains A Buy After Above-Expectations Q1 Earnings

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Elevator Pitch

I continue to assign a Buy investment rating to Procter & Gamble (NYSE:PG).

I did a comparison of Procter & Gamble and The Clorox Company (CLX) in my prior July 14, 2022 article, and I came to the conclusion that PG was “a better dividend stock” than CLX. The current article shines the spotlight on Procter & Gamble’s most recent Q1 FY 2023 (YE June 30) financial results announcement.

PG’s organic sales expansion, operating profit margin, and bottom line for the first quarter of the current fiscal year exceeded analysts’ expectations. Looking ahead, Procter & Gamble’s key business segments like home care and beauty & personal care are expected to achieve reasonably good sales growth in the next couple of years, according to independent market research. Considering these key factors, I retain a Buy rating for PG.

First Quarter Consensus Earnings Expectations For PG

The Wall Street analysts were anticipating that Procter & Gamble will deliver a non-GAAP core earnings per share or EPS of $1.55 for the first quarter of fiscal 2023. This would have translated into a good +28.1% QoQ bottom line expansion for PG as compared to the company’s Q4 FY 2022 normalized EPS of $1.21.

In reality, Procter & Gamble did even better than what the market expected, as detailed in the subsequent section.

Procter & Gamble’s Q1 Earnings Beat And Other Key Metrics

PG issued its Q1 FY 2023 earnings press release on October 19, 2022 before the market opened. Procter & Gamble’s actual first-quarter core EPS of $1.57 turned out to be +1.3% higher than the sell-side’s consensus bottom line projection. In other words, PG achieved a very strong +29.8% QoQ earnings growth in the most recent quarter. In YoY terms, Procter & Gamble’s Q1 FY 2023 bottom line only declined slightly by -2.5%.

Apart from its above-expectations EPS, the company also performed well on a number of key metrics for the first quarter of the current fiscal year.

Procter & Gamble’s organic sales expanded by +7% YoY in Q1 FY 2023, which was superior to the market’s consensus organic sales growth estimate of +5.5% as per S&P Capital IQ data. Specifically, price increases and favorable changes to the sales mix contributed +9 percentage points and +1 percentage points of PG’s +7% YoY organic sales growth in the recent quarter. This was offset by a -3 percentage points contraction in organic sales volume.

In fact, if one adjusts for headwinds relating to the Russian market, Procter & Gamble’s adjusted organic sales volume performance wouldn’t have been as poor as what the headline numbers suggest. PG revealed at the company’s Q1 FY 2023 earnings briefing that “more than two (percentage) points” of the -3% decline in organic sales volume for the company in the recent quarter was “actually driven by Russia.”

The Q1 FY 2023 organic sales metrics for Procter & Gamble suggest that the company boasts significant pricing power with its loyal customers. It is noteworthy that a +9% percentage points contribution to organic sales growth driven by price hikes only resulted in a mere -1 percentage points (excluding the Russian market) organic volume decline in the recent quarter.

Separately, PG’s actual profitability for the first quarter of fiscal 2023 was also above market expectations. Based on the consensus financial data obtained from S&P Capital IQ, Procter & Gamble’s Q1 FY 2023 gross profit margin of 47.4% turned out to be +20 basis points higher than the market’s consensus gross margin forecast of 47.2%. The 24.0% first quarter operating profit margin for PG was +30 basis points better than the sell-side’s consensus operating margin projection of 23.7%.

Besides price hikes, increased operating efficiency was also a key factor that enabled Procter & Gamble to achieve above-expectations profit margins in the recent quarter. At the company’s first quarter investor call, PG highlighted that “productivity improvements” contributed a +2.3 percentage points to its operating profit margin for Q1 FY 2023.

In summary, Q1 FY 2023 was a good quarter for PG. Procter & Gamble’s bottom line beat market expectations, while its actual organic sales growth and profit margins also came in better than what the analysts were forecasting.

Post-Results Financial Outlook For PG

Procter & Gamble provided updates on the company’s full-year fiscal 2023 (July 1, 2022 to June 30, 2023 period) management guidance in tandem with its Q1 FY 2023 earnings release.

It is encouraging that PG was able to maintain its organic sales growth guidance of +3%-5% and bottom line expansion guidance of +0%-4% for FY 2023, despite a challenging operating environment.

However, Procter & Gamble did note in its Q1 FY 2023 financial results media release that “it now expects EPS results to be towards the low end of the fiscal year guidance range” in view of “increased foreign exchange impacts.” This is aligned with the sell-side analysts’ consensus fiscal 2023 normalized EPS growth estimate of +0.3% as per S&P Capital IQ.

Notably, PG’s stock price only rose modestly by +0.9% on October 19, 2022 following its above-expectations Q1 earnings announcement. This is likely due to the fact that Procter & Gamble is now guiding for its full-year FY 2023 earnings to come in at “the low end” of management guidance.

In the next section, I discuss about PG’s growth expectations in the medium term.

Procter & Gamble’s Medium Term Growth Potential

It is relevant to focus on PG’s growth outlook in the intermediate term as an investor with a longer-term horizon.

Market research firm Euromonitor has published two key reports on Procter & Gamble and specific global consumer market segments in recent months, which offer a glimpse of how the company could potentially perform in the next few years.

An October 2022 Euromonitor research report (paid report not publicly available) titled “Procter & Gamble Co, The in Beauty and Personal Care (World)” highlighted that PG’s constant-currency retail sales growth in the worldwide beauty & personal care market is forecasted to accelerate from a CAGR of +4% in the 2018-2021 period to a +6% CAGR for the 2021-2024 (calendar year) period.

Specifically, Euromonitor takes the view that PG’s beauty & personal care businesses will continue to perform well in the coming years due to two key factors. The first factor is that PG has a high proportion of mass-market beauty & personal care brands which should still enjoy strong demand in a tough economic environment. The second factor is that Procter & Gamble has done a number of M&A deals in the skin care segment, which should allow it to capitalize on premiumization trends.

Another July 2022 Euromonitor research report (paid report not publicly available) with the title “The Procter & Gamble Co, The in Home Care (World)” noted that PG will retain its position as the largest home care company globally going forward boasting a retail sales CAGR of +5% in the market segment for the 2021-2024 (calendar year) time frame. As per Euromonitor’s analysis, PG’s customers are willing to accept price increases for the company’s laundry care products to a large extent. This is because hygiene has become an increasingly important issue following the COVID-19 outbreak, and consumers are willing to pay up for quality when it comes to laundry and other home care products.

In a nutshell, independent market research referred to above provides support for the view that Procter & Gamble’s key businesses will continue to achieve decent growth in the foreseeable future.

Closing Thoughts

Procter & Gamble stays as a Buy-rated stock in my opinion. PG’s recent quarterly results came in above the analysts’ forecasts, and the company’s medium-term outlook is also good based on third-party market research.

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