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Here's Why Hold Strategy is Best for Procter & Gamble (PG) Stock
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Procter & Gamble Company (PG - Free Report) has been resilient in a tough environment, given its focus on productivity and cost-saving plans, which have been boons for its margins. The company is also expected to benefit from continued strength in brands and appropriate strategies, which have been aiding organic sales growth. Its robust surprise trend has been boosting investors’ sentiments.
While the company has reported an earnings surprise for more than three years, revenues topped estimates for the fifth straight time in fourth-quarter fiscal 2021. Results were driven by robust top-line growth across all segments.
Shares of Procter & Gamble have rallied 6.5% in the year-to-date period compared with the industry’s growth of 0.9%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Staples sector, which declined 2.3% in the same period.
Image Source: Zacks Investment Research
Factors Supporting Growth
Procter & Gamble’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers around the world. Strength in its brands and appropriate strategies have been the key drivers. The company witnessed continued business momentum in fourth-quarter fiscal 2021 as reflected by organic sales growth. On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 4%, backed by a 1% gain each from an increase in shipment volume, favorable pricing and positive mix.
All of the company’s business segments posted organic sales growth, except for the Baby, Feminine and Family Care segment. Organic sales moved up 6% each in Beauty and Grooming, 14% in Health Care, and 2% in Fabric & Home Care. However, organic sales declined 1% in Baby, Feminine and Family Care.
The company’s continued business investments alongside efforts to offset macro cost headwinds and balanced top and bottom-line growth underscore its productivity efforts. It is witnessing cost savings and efficiency improvements across all facets of business, driven by its second five-year (fiscal 2017-2021) $10-billion productivity program. The second five-year restructuring plan targets cutting costs in areas, including supply chain and cost of goods sold (“COGS”), marketing and digitization, and promotional spend effectiveness.
The company’s core currency-neutral gross and operating margins reflected significant gains from productivity savings and pricing in fourth-quarter fiscal 2021. It recorded gains of 180 basis points (bps) and 320 bps on gross and operating margins, respectively, from productivity savings. Pricing gains aided the gross margin by 50 bps.
Management remains optimistic about its performance in fiscal 2022 as reflected by its outlook. The company anticipates all-in and organic sales growth of 2-4% each. Currency movements are likely to remain neutral to slightly positive to all-in sales growth in fiscal 2022. The company also expects organic sales growth of more than 8% in the first half of fiscal 2022. It also expects organic sales growth in the second half of fiscal 2022 to be stronger than the first half.
Earnings per share (EPS), on a reported basis, are expected to increase 6-9%, whereas the company reported $5.50 in fiscal 2021. Core EPS for fiscal 2022 is anticipated to grow 3-6% from $5.66 earned in fiscal 2021. The company expects earnings growth to be much stronger in the second half of fiscal 2022 as most of the cost headwinds are likely to occur in the first half. It projects a core effective tax rate of 18-19% for fiscal 2022.
Hurdles to Overcome
Procter & Gamble, like others in the industry, continues to witness headwinds related to commodity cost inflation and higher freight costs along with increased reinvestment costs and unfavorable mix. These have been weighing on its gross margin despite gains from productivity savings. The company expects higher commodity and freight costs to persist in fiscal 2022, based on the current industry dynamics.
The company notes that input costs have risen sharply, particularly for materials like resins, chemicals, and other ingredients, which have increased from 30% in April 2020 to 200%. With most of the material cost increases having occurred in calendar 2021, it expects the higher commodity costs to disproportionately hurt results in the first half of fiscal 2022. Based on current spot prices, the company expects an after-tax commodity cost headwind of $1.8 billion for fiscal 2022.
Freight costs have increased significantly, owing to several factors impacting the supply of drivers and the demand for drivers and trucks. Higher freight costs have also resulted from the 35% increase in diesel fuel priceso far in calendar 2021. It estimates an additional after-tax headwind of $100 million from freight and transportation costs in fiscal 2022. This is included in the company’s earning per share view for fiscal 2022. On a combined basis, commodity and freight costs, offset by foreign exchange gains, are likely to reduce earnings by 70 cents per share in fiscal 2022. This is expected to translate into a 12-percentage-point headwind on EPS growth.
Image: Bigstock
Here's Why Hold Strategy is Best for Procter & Gamble (PG) Stock
Procter & Gamble Company (PG - Free Report) has been resilient in a tough environment, given its focus on productivity and cost-saving plans, which have been boons for its margins. The company is also expected to benefit from continued strength in brands and appropriate strategies, which have been aiding organic sales growth. Its robust surprise trend has been boosting investors’ sentiments.
While the company has reported an earnings surprise for more than three years, revenues topped estimates for the fifth straight time in fourth-quarter fiscal 2021. Results were driven by robust top-line growth across all segments.
Shares of Procter & Gamble have rallied 6.5% in the year-to-date period compared with the industry’s growth of 0.9%. The Zacks Rank #3 (Hold) stock has also comfortably outperformed the Consumer Staples sector, which declined 2.3% in the same period.
Image Source: Zacks Investment Research
Factors Supporting Growth
Procter & Gamble’s products play a key role in meeting the daily health, hygiene and cleaning needs of consumers around the world. Strength in its brands and appropriate strategies have been the key drivers. The company witnessed continued business momentum in fourth-quarter fiscal 2021 as reflected by organic sales growth. On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 4%, backed by a 1% gain each from an increase in shipment volume, favorable pricing and positive mix.
All of the company’s business segments posted organic sales growth, except for the Baby, Feminine and Family Care segment. Organic sales moved up 6% each in Beauty and Grooming, 14% in Health Care, and 2% in Fabric & Home Care. However, organic sales declined 1% in Baby, Feminine and Family Care.
The company’s continued business investments alongside efforts to offset macro cost headwinds and balanced top and bottom-line growth underscore its productivity efforts. It is witnessing cost savings and efficiency improvements across all facets of business, driven by its second five-year (fiscal 2017-2021) $10-billion productivity program. The second five-year restructuring plan targets cutting costs in areas, including supply chain and cost of goods sold (“COGS”), marketing and digitization, and promotional spend effectiveness.
The company’s core currency-neutral gross and operating margins reflected significant gains from productivity savings and pricing in fourth-quarter fiscal 2021. It recorded gains of 180 basis points (bps) and 320 bps on gross and operating margins, respectively, from productivity savings. Pricing gains aided the gross margin by 50 bps.
Management remains optimistic about its performance in fiscal 2022 as reflected by its outlook. The company anticipates all-in and organic sales growth of 2-4% each. Currency movements are likely to remain neutral to slightly positive to all-in sales growth in fiscal 2022. The company also expects organic sales growth of more than 8% in the first half of fiscal 2022. It also expects organic sales growth in the second half of fiscal 2022 to be stronger than the first half.
Earnings per share (EPS), on a reported basis, are expected to increase 6-9%, whereas the company reported $5.50 in fiscal 2021. Core EPS for fiscal 2022 is anticipated to grow 3-6% from $5.66 earned in fiscal 2021. The company expects earnings growth to be much stronger in the second half of fiscal 2022 as most of the cost headwinds are likely to occur in the first half. It projects a core effective tax rate of 18-19% for fiscal 2022.
Hurdles to Overcome
Procter & Gamble, like others in the industry, continues to witness headwinds related to commodity cost inflation and higher freight costs along with increased reinvestment costs and unfavorable mix. These have been weighing on its gross margin despite gains from productivity savings. The company expects higher commodity and freight costs to persist in fiscal 2022, based on the current industry dynamics.
The company notes that input costs have risen sharply, particularly for materials like resins, chemicals, and other ingredients, which have increased from 30% in April 2020 to 200%. With most of the material cost increases having occurred in calendar 2021, it expects the higher commodity costs to disproportionately hurt results in the first half of fiscal 2022. Based on current spot prices, the company expects an after-tax commodity cost headwind of $1.8 billion for fiscal 2022.
Freight costs have increased significantly, owing to several factors impacting the supply of drivers and the demand for drivers and trucks. Higher freight costs have also resulted from the 35% increase in diesel fuel priceso far in calendar 2021. It estimates an additional after-tax headwind of $100 million from freight and transportation costs in fiscal 2022. This is included in the company’s earning per share view for fiscal 2022. On a combined basis, commodity and freight costs, offset by foreign exchange gains, are likely to reduce earnings by 70 cents per share in fiscal 2022. This is expected to translate into a 12-percentage-point headwind on EPS growth.
Better-Ranked Stocks to Watch
Albertsons Companies, Inc. (ACI - Free Report) has a long-term earnings growth rate of 12%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Coca-Cola Company (KO - Free Report) , with a Zacks Rank #2 (Buy) at present, has a long-term earnings growth rate of 8.7%.
Helen of Troy Limited (HELE - Free Report) , also a Zacks Rank #2 stock, has a long-term earnings growth rate of 8%.