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P&G (PG) Up 3.5% 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 3.5% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

P&G Beats on Q4 Earnings, Revenue Miss

Procter & Gamble reported fourth-quarter fiscal 2018 financial results, wherein earnings topped estimates while revenues lagged the same marginally. With this, the company has delivered a positive earnings surprise for 13 consecutive quarters. However, sales missed after reporting a beat in the last four quarters. Additionally, the company provided a soft view for the first half of fiscal 2019.

P&G’s fiscal fourth-quarter core earnings of 94 cents per share beat the Zacks Consensus Estimate of 90 cents and improved 11% year over year. The upside was primarily driven by increased net sales, lower core effective tax rate and reduced shares outstanding. This was partly negated by a lower core operating profit margin. Currency-neutral core earnings per share (EPS) improved 12%.

Sales in Detail

P&G’s reported net sales of $16,503 million, slightly lagging the Zacks Consensus Estimate of $16,552 million. However, the top line grew 2.6% from the year-ago period, given strong sales from its Beauty, Health Care, and Fabric & Home Care businesses. Foreign exchange had a 2% positive impact on sales.
    
Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 1% on the back of 3% increase in organic shipment volumes. However, pricing had a 2% negative impact on sales due to elevated merchandising investments.

Of the five business segments, three registered positive organic sales growth. In the reported quarter, Beauty, Health Care, and Fabric & Home Care segments registered organic sales growth of 7%, 1% and 2%, respectively. On the other hand, organic sales for the Grooming segment declined 3% while Baby, Feminine & Family Care segment registered a 2% decline.

Net sales for Beauty, Fabric & Home Care, and Health Care segments grew 10%, 3% and 4%, respectively. However, net sales declined 1% and 2%, respectively, for Grooming, and Baby, Feminine & Family Care segments.

Margins

Core gross margin decreased 140 basis points (bps) to 47.9%, as manufacturing cost savings and higher sales were more than offset by headwinds such as increased commodity and shipping costs, unfavorable pricing impacts, investments for product and packaging, and innovation start-ups as well as unfavorable mix and other impacts. Adverse currency hurt gross margin by 40 bps. On a currency-neutral basis, gross margin declined 100 bps.

Core selling, general and administrative expense (SG&A) decreased 120 bps (as a percentage of sales) to 29%, driven by productivity savings from overheads and non-working advertising spending (agency fee and ad production costs). Currency-neutral core SG&A declined 130 bps in the reported quarter.

Core operating margin decreased 30 bps year over year to 18.8%. On the other hand, currency-neutral core operating profit margin expanded 30 bps.

Productivity cost savings contributed 350 bps of margin benefit in the quarter under review. P&G has been cutting costs aggressively to reduce spending across all areas like supply chain, research & development, marketing, and overheads.

Financials

As of Jun 30, 2018, the company’s cash and cash equivalents were $2,569 million, down from $5,569 million at the end of fiscal 2017 (as of Jun 30, 2017). Long-term debt was $20.9 billion as of Jun 30, 2018, up from $18 billion at the end of fiscal 2017.

Cash flow from operating activities was $14,867 million in fiscal 2018, up from $12,753 million in fiscal 2017.

In fiscal 2018, the company returned $14.3 billion of cash to shareholders through $7.3 billion of dividend payments and $7 billion of common stock repurchase. Further, the company announced a 4% dividend hike in April 2018, which marked its 62nd consecutive year of dividend increase.

For fiscal 2019, the company guided adjusted free cash flow productivity of 90% or better. During the fiscal, the company expects to return cash to shareholders, including more than $7 billion of dividends and up to $5 billion of share repurchases.

Fiscal 2019 Guidance

P&G expects organic sales and core EPS for the second half of fiscal 2019 to be stronger than the first half. This will mostly be driven by pricing and productivity savings throughout fiscal 2019, which will offset the higher commodity costs and unfavorable currency effects.

The Cincinnati, OH-based company provided guidance for fiscal 2019, projecting organic sales growth of 2-3%. However, P&G expects all-in sales growth to be nearly flat to up 1% in fiscal 2019. The sales guidance includes an estimated 2% headwind from foreign currency, and acquisitions & divestitures.

The company anticipates core EPS growth of 3-8% in fiscal 2019 compared with fiscal 2018 core earnings of $4.22 per share. At the midpoint of the growth range, fiscal 2019 core EPS is likely to be $4.45. Earnings guidance includes a 9 cents negative impact from foreign currency and higher commodity costs. Core effective tax rate is expected to be 19-20%. The company expects the gain from the lower tax rate to be offset by higher interest expenses and lower non-operating income.

On a GAAP basis, EPS is expected to increase 16-23% versus the fiscal 2018 GAAP EPS of $3.67.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, P&G has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is more suitable for momentum investors than value investors.

Outlook

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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