P&G (PG) Down 5.7% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Procter & Gamble (PG). Shares have lost about 5.7% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Procter & Gamble Q3 Earnings Beat Estimates, Sales Up

Procter & Gamble, popularly known as P&G, reported third-quarter fiscal 2020 results, with earnings per share surpassing the Zacks Consensus Estimate. Also, sales were in line with the consensus mark. Moreover, earnings and sales increased on a year-over-year basis.

Procter & Gamble’s core earnings of $1.17 per share rose 10% year over year and outpaced the Zacks Consensus Estimate of $1.12. Meanwhile, currency-neutral core earnings per share increased 15%.

The company reported net sales of $17,214 million, up 5% year over year and in line with the Zacks Consensus Estimate. Currency fluctuations hurt the top line by two percentage point.

Sales in Detail

On an organic basis (excluding the impact of acquisitions, divestitures and foreign exchange), revenues moved up 6% based on 6% rise in organic shipment volume. Further, sales inched up1% owing to higher pricing. The company mix to net sales growth was flat year over year.

Moreover, all of the company’s business segments except Grooming reported growth in organic sales. Organic sales moved up1% in the Beauty segment, 9% in Health Care, and 10% in Fabric & Home Care as well as 7% in the Baby, Feminine and Family Care segment. However, the metric declined 1% in the Grooming division.

Net sales in the Health Care, Fabric & Home Care, and Baby, Feminine and Family Care segments rose 7%, 8% and 6%, respectively. However, net sales in the Beauty and Grooming segments declined 1% and 3%, respectively.

Margins

In the reported quarter, core gross margin increased 120 basis points (bps) year over year to 50.4%, including 10 bps of adverse impact of foreign currency. On a currency-neutral basis, core gross margin expanded 130 bps owing to benefits from gross productivity savings, higher pricing and commodity cost declines. The uptick was partly offset by unfavorable product mix and other headwinds.

Core selling, general and administrative expenses (SG&A), as a percentage of sales, increased 20 bps to 29.5%. The metric declined 50 bps on a currency-neutral basis. The decline was caused by advantage from sales leverage along with savings from overhead and marketing expenses. However, higher marketing investments, inflation and other impacts were deterrents.

Moreover, core operating margin expanded 100 bps. On a currency-neutral basis, the metric improved 180 bps, driven by 240 bps of total productivity cost savings.

Financials

Procter & Gamble ended the reported quarter with cash and cash equivalents of $15,393 million, long-term debt of $23,310 million and total shareholders’ equity of $45,941 million.

Cash flow from operating activities amounted to $12,597 million for the nine months ended Mar 31, with operating cash flow of $4.1 billion in fiscal third quarter. Moreover, free cash flow productivity was 113%.

Furthermore, the company returned $2.8 billion of cash to its shareholders in fiscal third quarter. This included dividend payouts worth $1.9 billion and share buybacks of $900 million.

For fiscal 2020, the company reaffirmed its view for adjusted free cash flow productivity at 100%. It expects to pay out more than $7.5 billion dividends and repurchase $7-$8 billion of common shares in fiscal 2020. Recently, management announced a 6% increase in the quarterly dividend, marking the company’s 64th consecutive year of dividend increase.

Fiscal 2020 Guidance

Due to stronger headwind from foreign exchange rates, Procter & Gamble has revised its all-in sales view downward for fiscal 2020. The company now projects all-in sales to grow 3-4% compared with 4-5% mentioned earlier. The guidance includes a two percentage point of adverse foreign currency, which is likely to be offset by modest gain from acquisitions and divestitures.

The company reaffirmed its organic sales guidance of a 4-5% growth in the fiscal. Moreover, the company reiterated core EPS growth of 8-11% year over year for fiscal 2020. In fiscal 2019, the company reported core earnings of $4.52 per share.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -7.86% due to these changes.

VGM Scores

Currently, P&G has a nice Growth Score of B, a grade with the same score on the momentum front. 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 B. 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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