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P&G (PG) Down 0.2% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Procter & Gamble (PG - Free Report) . Shares have lost about 0.2% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is P&G due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Procter & Gamble Beats Q3 Earnings & Sales Estimates

Procter & Gamble has posted better-than-expected third-quarter fiscal 2021 results, wherein both earnings and sales improved year over year. Results have been driven by robust top-line growth as well as improved margins. Encouragingly, management has reiterated its outlook for fiscal 2021.

Procter & Gamble’s earnings of $1.26 per share rose 8% from core earnings of $1.17 per share in the year-ago quarter. It also outpaced the Zacks Consensus Estimate of $1.19 on the back of sturdy sales growth and improved operating margin. Meanwhile, currency-neutral core earnings per share (EPS) also increased 8%.

The company reported net sales of $18,109 million, increasing 5% year over year and surpassing the Zacks Consensus Estimate of $17,837 million. Sales growth was attributed to strength across all segments coupled with robust pricing and mix.

Net sales for the Beauty and Fabric & Home Care segments rose 9% and 8%, respectively, and sales for the Health Care and Grooming segments grew 4% each. Meanwhile, sales for the Baby, Feminine and Family Care segment remained flat year over year.

On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 4%, backed by two percentage points of gains each in pricing and mix. The company reported a positive mix, owing to uneven growth of premium Home Care, Oral Care and Appliances categories along with strength in North America and Greater China regions. Shipment volumes were flat year over year.

Moreover, all of the company’s business segments reported growth in organic sales, except for the Baby, Feminine and Family Care segment. Organic sales moved up 7% in Beauty, 4% in Grooming, 3% in Health Care, and 7% in Fabric & Home Care. However, organic sales declined 1% in Baby, Feminine and Family Care.

Margins

In the reported quarter, gross margin expanded 30 basis points (bps) to 50.7% from the prior-year core gross margin. On a currency-neutral basis, gross margin expanded 80 bps from the prior-year core gross margin, owing to the benefits from productivity savings and higher pricing. This was partly offset by an increase in commodity costs, unfavorable product mix, product investments and other costs.

Selling, general and administrative expenses (SG&A), as a percentage of sales, rose 30 bps from the year-ago quarter’s core SG&A expenses to 29.8%. Adverse currency negatively impacted SG&A expenses by 20 bps. The metric increased 50 bps on a currency-neutral basis. This can be attributable to 150 bps of marketing reinvestments, and 110 bps of inflation and other costs, offset by a 120-bps gain from sales leverage, and 90 bps of productivity savings from lower overhead and marketing costs.

Moreover, the operating margin was flat at 20.9% from the year-ago quarter’s core operating margin. Unfavorable currency hurt operating margin by 30 bps. On a currency-neutral basis, the operating margin improved 30 bps, driven by 210 bps of total productivity cost savings.

Financials

Procter & Gamble ended the reported quarter with cash and cash equivalents of $10,007 million, long-term debt of $21,053 million, and total shareholders’ equity of $46,919 million.

The company generated operating cash flow of $4.1 billion in third-quarter fiscal 2021. Moreover, free cash flow productivity was 106%.

Furthermore, the company returned $5 billion of cash to its shareholders in the fiscal third quarter. This included $2 billion of dividend payouts and $3 billion of share buybacks. In April 2021, the company raised its quarterly dividend by 10%.

Fiscal 2021 Guidance

Management retained its guidance for fiscal 2021. The company anticipates all-in and organic sales growth of 5-6% each. Currency movements are likely to remain neutral to sales growth in fiscal 2021.

Further, EPS on a reported basis are expected to increase 8-10%, whereas it reported $4.96 in fiscal 2020. The GAAP EPS guidance takes into account non-core charges of 16 cents per share for fiscal 2021 due to the early debt retirement.

Core EPS for fiscal 2021 are projected to grow 8-10%, whereas it earned $1.52 in fiscal 2020. The view takes into account an after-tax headwind of $150 million due to currency woes, and more than $200 million from higher freight costs. For fiscal 2021, the company now expects headwinds of $125 million from commodity costs.

Adjusted free cash flow productivity is now estimated to be more than 100% for fiscal 2021 compared with 95-100% mentioned earlier. In addition to this, the company now anticipates returning more than $19 billion of cash to shareholders in fiscal 2021 compared with $18 billion stated earlier. It plans to make dividend payments of more than $8 billion in fiscal 2021. The company now expects a share repurchase of up to $10-$11 billion for fiscal 2021 compared with $10 billion stated earlier.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -8.13% due to these changes.

VGM Scores

Currently, P&G has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, P&G has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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