Procter & Gamble (PG) Surges 47% in a Year: More Room to Run?

The Procter & Gamble Company PG, popularly known as P&G, is on the roll, owing to the robust surprise trend due to ongoing initiatives to improve productivity. With a view to boosting top and bottom lines, the company remains focused on various efforts that include product innovation, packaging & marketing enhancements, and productivity and cost-saving plans. These efforts not only aided the quarterly outcome but also boosted the share price.

The robust quarterly performance is evident from the company’s 16th straight earnings beat in third-quarter fiscal 2019, with the sixth sales beat in the last seven quarters.  Further, it delivered strong organic sales growth on the back of higher shipment volume and favorable price/mix.

The positive investor sentiment on P&G is well reflected by 47.9% growth in share price recorded in the past year. This performance is well ahead of the industry’s growth of 28.8% in the same period.

 

However, like all consumer goods companies, P&G is witnessing strained margins due to higher costs, with continued impacts of foreign currency rates, which cannot be ignored. With these headwinds likely to continue through the rest of the fiscal year, let’s see how this Zacks Rank #3 (Hold) company will retain stock momentum.

Factors to Aid Stock Rally

We believe that P&G’s growth initiatives not only promise productivity and margin growth in the long run but will also provide enough fodder to sustain positive investor sentiment. As we can see, the company’s continued investment in business, alongside efforts to offset macro cost headwinds and balance top and bottom-line growth, underscore productivity efforts. With cost savings and efficiency improvements across all facets of business, the company is nearing the mid-point of the second five-year (fiscal 2017-2021) cost-saving target of $10 billion.

Additionally, the company’s efforts to enhance the product portfolio by acquiring complementary businesses and divesting underperforming ones have been key a highlight. Notably, it acquired a private company — This is L. — that produces period products with natural ingredients. This will aid in expanding its naturals product range, which is a key focus area for most day-to-day consumer product companies at present.

Some other recent acquisitions include the beauty brand — First Aid Beauty, the consumer health business of Germany-based Merck KGaA and Walker & Company Brands, all in 2018. These acquisitions should bolster the company’s product portfolio in various categories. Simultaneously, it divested several assets over the years as part of the portfolio-reshaping plan.

These actions have been the key to the company’s robust quarterly performance over the years. Furthermore, management’s raised sales guidance for fiscal 2019 reflects its confidence in growth for the future. It now projects all-in sales growth of flat to up 1% versus the range of down 1% to up 1% mentioned earlier. Organic sales are now estimated to increase 4% compared with 2-4% stated earlier.  The raised sales view is attributed to robust organic sales growth in the most recent quarter.

Moreover, the company continues to anticipate core EPS growth of 3-8% for fiscal 2019. Core earnings were $4.22 per share in fiscal 2018.

Wrapping Up

P&G is no exception to the sluggish margin trends prevailing in the consumer packaged goods industry. Like most of its peers, the company’s margins continue to be strained due to higher commodity and shipment costs as well as increased brand investments. Intense competition and adverse currency remain other constraints to margin.

While P&G’s core gross margin remained flat year over year in third-quarter fiscal 2019, core operating margin contracted 60 bps. Although the company’s cost-saving initiatives contributed meaningfully to margin expansion, this was not enough to negate the ongoing headwinds. Notably, core operating margin contracted for the seventh consecutive quarter.

Though pricing gains slightly cushioned negative margin trends in the fiscal third quarter, the company expects currency headwinds, higher business investments, competitive dynamics and commodity costs to weigh on margins in the near term.

Nonetheless, P&G’s ongoing growth efforts seem appropriate to offset these near-term hurdles. Further, the company’s expected long-term earnings growth rate of 6.9% speak well of its growth potential.

Don’t Miss These Better-Ranked Stocks

Unilever PLC UL, with long-term earnings per share growth rate of 6.4%, currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Colgate-Palmolive Co. CL has a long-term earnings growth rate of 5.4%. The stock presently carries a Zacks Rank #2 (Buy).

Church & Dwight Co., Inc. CHD, with long-term earnings per share growth rate of 8.4%, also carries a Zacks Rank #2 at present.

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