Procter’s Earnings Start To Show Weakness In Q4


Procter and Gamble (NYSE: PCG) is an American multinational consumer goods company headquartered in Cincinnati, Ohio. P&G reported earnings on the 29thth July 2022, and shares were down 4% in premarket results.



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“Fiscal 2022 was another strong year,” said Jon Moeller, chairman of the board, president and CEO. “The P&G team’s execution of our integrated strategies delivered strong top-line growth, earnings growth and significant cash returns to shareholders in the face of severe cost and operating headwinds. We look forward to another year of strong headwinds as we look to fiscal 2023. We remain committed to our integrated strategies of excellence, productivity, constructive disruption, and an agile and accountable organizational structure, which remain the right strategies moving forward. towards the short-term challenges we face and continue to deliver balanced growth and value creation.”

Prudent management leads to another strong quarter

Procter reported revenue of $19.52 billion in the quarter, and management was keen to point out that the company performed better than expected on both the top and bottom lines, despite facing headwinds against the currency of $3.3 billion. Fourth-quarter earnings per share were up 7% from the same quarter in 2021, but management has indicated that total earnings will slow going forward.

Home care and cleaning products were up 4% for the year, while sales in the baby and family care segment were up just 2%. Beauty sales were flat and skin care products were up 1%.

Net sales for the year were $80 billion, up 5% from the previous fiscal year. Meanwhile, diluted earnings per share (EPS) came in at $5.81. Operating cash flow was $16.7 billion and adjusted free cash flow yield was 93%. The company returned $19 billion to investors in buybacks and dividends during the year.

The company faced numerous headwinds during the quarter as sales in China and Russia continued to hurt segments such as beauty products. Lower volumes in all segments were primarily a result of issues stemming from China and Russia.

Management remains cautious on its outlook and understands that it faces numerous challenges globally as central banks continue to raise interest rates simultaneously to counter inflation, which in turn is affecting purchasing power. EPS for fiscal 2023 is expected to be 2% higher, and revenue is expected to be around 3-5% higher with similar levels of organic sales.

P&G remains a well-known global brand that sells key household items. The company expected higher single-digit revenue for the year and could hit those targets next year as expansion into emerging markets starts to pay dividends.

Evaluation

Procter and Gamble faces cyclical issues and the valuation remains slightly higher than what investors might be comfortable with. The stock currently trades at 24x price-to-earnings and has a dividend yield of 2.5%. Given that the US 10-year Treasury is now trading around 3%, there is a chance that stocks could see a slight drop, especially if growth continues to be weaker than expected. Additionally, the company’s net profit margins have been higher than expected over the past year, and that could begin to change especially if inflationary pressures continue. So far, P&G has been able to maintain a 17-18% net profit margin by passing the costs on to consumers. But the strategy has limitations even though the company falls under the consumer durables category.

Debt to equity remains low and management has indicated it will continue to reduce debt, with long-term debt currently at $22 billion, but the balance sheet remains relatively safe for now. Cash declined to $10 billion for the fiscal year, largely thanks to buybacks and dividends. The company’s current ratio also remains healthy at 4:1 and there is very little chance of major debt-related issues emerging.

P&G has strong institutional ownership, but pundits continue to sell

P&G remains a top-tier stock and has a five-year beta of .39, making it a low-volatility stock. The company’s largest institutional investors include Vanguard, State Street Advisors and T.Rowe Price, all well-known names in the industry. But over the past two quarters, company executives and insiders have been selling shares, as many likely believe the stock has peaked for now.



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