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P&G (PG) Up 10.9% Since Last Earnings Report: Can It Continue?
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A month has gone by since the last earnings report for Procter & Gamble (PG - Free Report) . Shares have added about 10.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is P&G due for a pullback? 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 reported better-than-expected top and bottom lines in first-quarter fiscal 2023. Sales improved year over year, while earnings declined. Top-line growth was driven by robust pricing and a favorable mix, along with strength across segments. Improved productivity amid cost headwinds has also aided the results.
Q1 in Detail
Procter & Gamble’s core earnings of $1.57 per share declined 2% from $1.61 in the year-ago quarter. This can be attributable to the lower operating margin, offset by higher sales and lower outstanding shares. The figure beat the Zacks Consensus Estimate of $1.55 and came in line with our estimate of $1.57. Currency-neutral net EPS rose 7% year over year.
The company reported net sales of $20,612 million, increasing 1% year over year and surpassing the Zacks Consensus Estimate of $20,455 million and our estimate of $20,451.5 million. Sales growth was attributed to strength across all segments, except for Grooming and Beauty, as well as robust pricing and a favorable mix. Currency impacted net sales by 6%.
On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 7%, backed by a 9% rise in pricing and a 1% gain from the positive product mix, offset by a 3% decline in volume.
Net sales for the Health Care segment increased 3%, while sales for the Fabric & Home Care, and Baby, Feminine & Family Care segments increased 1% each. Meanwhile, sales for the Beauty segment declined 4% and the Grooming segment was flat year over year. All of the company’s business segments have reported growth in organic sales. Organic sales rose 4% for Beauty, 5% for Grooming, 8% each for Fabric & Home Care, and Health Care segments, and 6% for the Baby, Feminine & Family Care segment.
Margins
In the reported quarter, the gross margin contracted 160 basis points (bps) to 47.4%. Favorable currency rates aided the gross margin by 0.3%. The currency-neutral gross margin declined 130 bps to 47.7%. The decline in the gross margin was mainly due to a 510-bps commodity and input material cost inflation, a 40-bps increase in freight costs, a 130-bps negative product mix and other impacts, and 30 bps from product and packaging investments. This was partly negated by 470 bps of pricing gains and 100 bps of gross productivity savings.
Selling, general and administrative expenses (SG&A), as a percentage of sales, declined 90 bps from the year-ago quarter to 23.4%. Currency aided the SG&A expense rate by 0.5%. SG&A expenses declined 140 bps to 22.9% on a currency-neutral basis, owing to 170 bps of leverage benefits due to higher sales, and 120 bps of productivity savings from overhead and marketing efficiencies, offset by 100 bps of overhead investments and 50 bps of other impacts.
The operating margin declined 70 bps from the prior year to 24%. Currency rates aided the operating margin by 0.8%. On a currency-neutral basis, the operating margin expanded 10 bps to 24.8%. The operating margin included gross productivity savings of 230 bps.
Financials
Procter & Gamble ended first-quarter fiscal 2023 with cash and cash equivalents of $6,710 million, long-term debt of $21,286 million, and total shareholders’ equity of $44,334 million.
The company generated an operating cash flow of $4,070 million in first-quarter fiscal 2023 and an adjusted free cash flow of $3,405 million. Adjusted free cash flow productivity was 86% in the fiscal first quarter.
It returned $6.3 billion of value to its shareholders in the fiscal first quarter. This included $2.3 billion of dividend payouts and $4 billion of share buybacks.
Fiscal 2023 Guidance
Management lowered its all-in sales view for fiscal 2023, while retaining its organic sales expectations. The company anticipates all-in sales between down 3% and down 1% year over year for fiscal 2023 compared with flat to up 2% sales growth stated earlier. Organic sales are likely to increase 3-5% in fiscal 2023. Currency movements are expected to negatively impact all-in sales growth by 6% versus the 3% impact mentioned earlier.
The company also retained its view for fiscal 2023 EPS. It expects reported EPS to be flat to up 4% from $5.81 recorded in fiscal 2022. However, the company expects EPS at the low end of the prior mentioned range due to the increased currency impacts.
The current earnings view considers after-tax impacts of $1.3 billion related to unfavorable currency movements, $2.4 billion of impacts of higher commodity and material costs, and $200 million from higher freight costs. This equates to a $3.9-billion after-tax impact on net income, implying a $1.57-per-share on EPS or a 23-percentage-point impact on EPS growth. The revised $3.9-billion headwinds marks a $600-million increase from the company’s prior view of $3.3 billion.
Procter & Gamble projects a core effective tax rate of 19.5% for fiscal 2023. It expects capital expenditure to be 5% of net sales in fiscal 2023.
Adjusted free cash flow productivity is estimated to be 90% for fiscal 2023. The company intends to make dividend payments of more than $9 billion, along with share repurchases of $6-$8 billion in fiscal 2023.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
VGM Scores
Currently, P&G has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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. It's no surprise P&G has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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P&G (PG) Up 10.9% Since Last Earnings Report: Can It Continue?
A month has gone by since the last earnings report for Procter & Gamble (PG - Free Report) . Shares have added about 10.9% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is P&G due for a pullback? 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 Q1 Earnings & Sales Estimates
Procter & Gamble reported better-than-expected top and bottom lines in first-quarter fiscal 2023. Sales improved year over year, while earnings declined. Top-line growth was driven by robust pricing and a favorable mix, along with strength across segments. Improved productivity amid cost headwinds has also aided the results.
Q1 in Detail
Procter & Gamble’s core earnings of $1.57 per share declined 2% from $1.61 in the year-ago quarter. This can be attributable to the lower operating margin, offset by higher sales and lower outstanding shares. The figure beat the Zacks Consensus Estimate of $1.55 and came in line with our estimate of $1.57. Currency-neutral net EPS rose 7% year over year.
The company reported net sales of $20,612 million, increasing 1% year over year and surpassing the Zacks Consensus Estimate of $20,455 million and our estimate of $20,451.5 million. Sales growth was attributed to strength across all segments, except for Grooming and Beauty, as well as robust pricing and a favorable mix. Currency impacted net sales by 6%.
On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 7%, backed by a 9% rise in pricing and a 1% gain from the positive product mix, offset by a 3% decline in volume.
Net sales for the Health Care segment increased 3%, while sales for the Fabric & Home Care, and Baby, Feminine & Family Care segments increased 1% each. Meanwhile, sales for the Beauty segment declined 4% and the Grooming segment was flat year over year. All of the company’s business segments have reported growth in organic sales. Organic sales rose 4% for Beauty, 5% for Grooming, 8% each for Fabric & Home Care, and Health Care segments, and 6% for the Baby, Feminine & Family Care segment.
Margins
In the reported quarter, the gross margin contracted 160 basis points (bps) to 47.4%. Favorable currency rates aided the gross margin by 0.3%. The currency-neutral gross margin declined 130 bps to 47.7%. The decline in the gross margin was mainly due to a 510-bps commodity and input material cost inflation, a 40-bps increase in freight costs, a 130-bps negative product mix and other impacts, and 30 bps from product and packaging investments. This was partly negated by 470 bps of pricing gains and 100 bps of gross productivity savings.
Selling, general and administrative expenses (SG&A), as a percentage of sales, declined 90 bps from the year-ago quarter to 23.4%. Currency aided the SG&A expense rate by 0.5%. SG&A expenses declined 140 bps to 22.9% on a currency-neutral basis, owing to 170 bps of leverage benefits due to higher sales, and 120 bps of productivity savings from overhead and marketing efficiencies, offset by 100 bps of overhead investments and 50 bps of other impacts.
The operating margin declined 70 bps from the prior year to 24%. Currency rates aided the operating margin by 0.8%. On a currency-neutral basis, the operating margin expanded 10 bps to 24.8%. The operating margin included gross productivity savings of 230 bps.
Financials
Procter & Gamble ended first-quarter fiscal 2023 with cash and cash equivalents of $6,710 million, long-term debt of $21,286 million, and total shareholders’ equity of $44,334 million.
The company generated an operating cash flow of $4,070 million in first-quarter fiscal 2023 and an adjusted free cash flow of $3,405 million. Adjusted free cash flow productivity was 86% in the fiscal first quarter.
It returned $6.3 billion of value to its shareholders in the fiscal first quarter. This included $2.3 billion of dividend payouts and $4 billion of share buybacks.
Fiscal 2023 Guidance
Management lowered its all-in sales view for fiscal 2023, while retaining its organic sales expectations. The company anticipates all-in sales between down 3% and down 1% year over year for fiscal 2023 compared with flat to up 2% sales growth stated earlier. Organic sales are likely to increase 3-5% in fiscal 2023. Currency movements are expected to negatively impact all-in sales growth by 6% versus the 3% impact mentioned earlier.
The company also retained its view for fiscal 2023 EPS. It expects reported EPS to be flat to up 4% from $5.81 recorded in fiscal 2022. However, the company expects EPS at the low end of the prior mentioned range due to the increased currency impacts.
The current earnings view considers after-tax impacts of $1.3 billion related to unfavorable currency movements, $2.4 billion of impacts of higher commodity and material costs, and $200 million from higher freight costs. This equates to a $3.9-billion after-tax impact on net income, implying a $1.57-per-share on EPS or a 23-percentage-point impact on EPS growth. The revised $3.9-billion headwinds marks a $600-million increase from the company’s prior view of $3.3 billion.
Procter & Gamble projects a core effective tax rate of 19.5% for fiscal 2023. It expects capital expenditure to be 5% of net sales in fiscal 2023.
Adjusted free cash flow productivity is estimated to be 90% for fiscal 2023. The company intends to make dividend payments of more than $9 billion, along with share repurchases of $6-$8 billion in fiscal 2023.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
VGM Scores
Currently, P&G has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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. It's no surprise P&G has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.