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Procter & Gamble (PG) Posts Solid Q1, Volatility a Drag

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On Nov 14, we issued an updated research report on The Procter & Gamble Company (PG - Free Report) or P&G. This consumer goods giant, with a market cap of around $223.66 billion, has seen its shares rise roughly 5.64% so far this year as against a 6% increase for the S&P 500 over the same period.

Q1 Recall

P&G started the fiscal with broad-based organic sales growth across product categories and markets, as well as strong cost savings. The company’s first-quarter earnings and revenues also beat expectations. Notably, organic sales, which grew 3%, marked its best performance in over two years. Productivity improvements and aggressive cost-saving efforts have consistently improved margins with the trend expected to continue in the quarters ahead.

All the five business segments recorded organic sales growth. Health Care and Fabric & Home Care segments reported 7% and 4% growth, respectively, in the fiscal first quarter. Beauty and Grooming segments witnessed 3% organic sales growth, whereas the Baby, Feminine & Family Care segment reported 2%.

In developing markets, organic sales were up 6% on 3% volume growth, as the pricing positively impacted the top line. On the other hand, in developed markets, organic sales were up 2% on 4% volume growth, reflecting heightened promotional activity in part to address price gaps in certain categories.

Core gross margin expanded 50 basis points to 51.6% in the fiscal first quarter as productivity cost savings and higher volume benefits were offset by currency headwinds, unfavorable mix, innovation and capacity investments and higher commodity costs.

Following the wrap up of the company’s beauty brands merger with Coty in Oct 2016, P&G has a portfolio of about 65 consumer and shopper preferred leading brands focusing on 10 categories organized under four industry-based sectors. These brands have historically grown faster and have been more profitable than others.

Hiccups

Although P&G saw higher organic sales in the fiscal first quarter, the company lost global market share in four of its five reporting segments, while Fabric & Home Care was flat. P&G has been struggling over the past few quarters to boost market growth. Meanwhile, P&G maintained its full-year outlook of mid-single-digit core EPS growth and 2% organic sales growth despite the outperformance in the first quarter as it anticipates continued market volatility.

P&G is operating in a challenging and volatile macro environment. Market growth rates are constantly decelerating, mainly due to slow growth in developing markets, which is hurting sales. The company’s market share growth trends in the developing markets, constituted around 35% of its global sales as of fiscal 2016, down from fiscal 2015 level of 38%.

Zacks Rank & Key Picks

P&G holds a Zacks Rank #3 (Hold). Better-ranked consumer staples stocks are Dr Pepper Snapple Group, Inc. (DPS - Free Report) , Coca-Cola Amatil Ltd. (CCLAY - Free Report) and Pepsico, Inc. (PEP - Free Report) , all carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Dr Pepper Snapple recorded an average positive earnings surprise of 5.45% over the past four quarters, with a beat in each.

Coca-Cola Amatil’s full-year 2016 earnings growth is projected at 10.8%.

PepsiCo had a stellar earnings surprise history with an average positive surprise of 5.35% for the last four quarters, with a beat in each.

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