Procter & Gamble Moves Up the Charts: Will Growth Continue?

Zacks Equity Research - Posted 5 years ago

The Procter & Gamble Company PG, popularly known as P&G, is gaining momentum on the back of robust surprise trend due to ongoing initiatives to improve productivity. Moreover, the company remains focused on improving its product portfolio through strategic initiatives. It is also on track with its cost-saving plans.

All these factors helped the company to deliver robust third-quarter fiscal 2019 results, wherein the top and bottom lines surpassed the Zacks Consensus Estimate and improved year over year. Driven by these upsides, shares of this Cincinnati, OH-based company have rallied approximately 44% in the past one year outperforming the industry’s growth of around 30%.

Factors Narrating Procter & Gamble’s Growth Story

Procter & Gamble remains focused on productivity and cost-saving plans to boost margins. The company’s continued investment in business, alongside efforts to offset macro cost headwinds and balance top and bottom-line growth, underscore its 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-savings target of $10 billion.

Additionally, the company emphasizes on improving its product portfolio through strategic initiatives, which enable it to concentrate on its fast-growing businesses. For this, it relies on its strategy of acquiring complementary businesses. The company also follows a systematic divestiture plan to streamline its portfolio. Notably, it has 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 driving 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.

Bottom Line

However, Procter & Gamble has been witnessing strained margins owing to increased commodity and shipping costs, higher brand investments amid intense competition. 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 seventh consecutive quarter. While 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. Moreover, adverse currency rates are hurting the company’s results, which may persist in fiscal 2019.

Nonetheless, we expect all aforementioned factors to offset minor hurdles and help bolster this Zacks Rank #3 (Hold) stock’s momentum.

Key Picks

Unilever N.V. UN has a long-term earnings growth rate of 8.2% and sports a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Colgate-Palmolive Company CL has a long-term earnings growth rate of 5.4% and a Zacks Rank #2.

The Clorox Company CLX has a long-term earnings growth rate of 5.5% and a Zacks Rank #2.

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