Procter & Gamble shares were down sharply in early trading Friday after the consumer products giant reported a mixed quarter. We viewed this action as a type of profit taking – not a reflection of results. The stock entered the session on a four-day winning streak while the broader market was falling. Friday evening, as the Dow Jones turned green, so did P&G shares. P&G’s sales in the quarter ended March 31 rose 1% year over year (3% organic) to $20.195 billion, below the $20.408 billion analysts expected, according to the data provider. LSEG data. Adjusted earnings per share rose 11% to $1.52, beating analysts’ forecasts of $1.37. Procter & Gamble Why We Own It: We like P&G because demand for its household and personal care products doesn’t tend to fluctuate with the economy. It has actually faced high inflation over the past two years. With signs of upside lately and expectations of higher interest rates from the Fed for longer, we are happy to have this defensive stock in our portfolio. Competitors: Colgate-Palmolive and Unilever Weight in Club portfolio: 2.6% Most recent purchase: April 3, 2024 Initiated: April 7, 2022 Final result Sales were weaker than expected, but they were more than offset by a 300 basis point improvement in gross margin, resulting in lower profits. And thanks to this strong profitability, management was able to raise its full-year profit forecast to a level above Wall Street’s expectations, even at the low end. Just as importantly, operating cash flow and free cash flow generation significantly exceeded expectations. Cash flow is critical to shareholder returns, so we were pleased to see the company report a free cash flow-adjusted productivity result (calculated as operating cash flow excluding capital expenditures divided by net profit) of 87%. This allowed management to repurchase $1 billion worth of PG stock while paying an additional $2.3 billion in dividends. Procter & Gamble last week increased the payout by 7%, the 68th consecutive increase (it’s also the 134th consecutive year PG has paid a dividend). On the investor call after the earnings release, Chief Financial Officer Andre Schulten said there was “no notable decline” in private labels in the United States, but that the company sees buyers turn to P&G products. Volumes were impacted by some destocking, which should not constitute a prolonged obstacle. Schulten expects to see volumes increase beyond the 3% mark reached this quarter. Exchange rates are becoming less restrictive and the prices of raw materials are falling. Taking into account the strong cash flow generation, revised guidance and improved volumes, we came away very happy with the future of Procter & Gamble, regardless of the economic environment. As a result, we reiterate our 1 rating and increase our price target to $170 (from $168). Procter & Gamble offers best-in-class value and can therefore grow profits through a combination of cost discipline and volume growth (not just through price increases). This will set P&G apart from its peers through 2024 and leave North American destocking and China weakness behind us. PG YTD Mountain Procter & Gamble YTD Guidance Management said fiscal 2024 core profit, which excludes one-time items, is expected to grow between 10% and 11% from 2023. That’s up from 8 % to 9% previously forecast. Based on a full fiscal 2023 of $5.90, that means a new range of $6.49 to $6.55, a beat above the consensus estimate of $6.46, even at the low end of the scale. For the full year, the overall sales growth rate was reiterated at between 2 and 4% as well as the organic growth target of 4 to 5%. The expected unfavorable currency effects on sales, of 1 to 2%, were also reiterated. Net interest expense is still expected to be a $100 million hurdle. The impact of currency on results is also diminishing, with management now forecasting a $600 million after-tax impact in fiscal 2024, down from the $1 billion headwinds previously expected. Additionally, the team now expects lower raw material costs to represent a $900 million after-tax tailwind, up from $800 million previously. Quarterly Results As we can see in the results table above, sales growth was weaker than consensus, but the company was able to more than compensate on the cost side thanks to lower raw material prices. This resulted in a lower cost of sale and therefore a higher gross profit margin than expected. Healthcare and Health Care emerge as failures in the chart above, in terms of pre-tax income performance in key segments. But the failures were extremely marginal, a fraction of a percentage point below expectations. So, in our opinion, beauty was the only segment that really fell short of expectations. And that’s to be expected following Ulta Beauty’s comments at a recent JPMorgan retail conference. On the call, Schulten said growth across all categories continues to be broad-based, with 8 of 10 product categories holding or increasing organic sales this quarter. In North America, sales of organic products increased by 3% thanks to a 3% increase in volumes. Although this figure was down from the previous quarter’s 4% volume increase, there was a one percentage point headwind resulting from retail inventory destocking in the personal healthcare category . In Europe, target markets grew by 7% thanks to a 4% increase in volumes, and in Latin America, organic sales increased by 17% compared to the same period last year. Weakness continued in Greater China, with organic sales down 10%. However, this is a sequential improvement compared to the 15% decline recorded in the previous quarter. “We have seen some month-over-month improvement in overall sales trends in Greater China, although we expect it will take another quarter or two before we return to growth,” Schulten said. (Jim Cramer’s Charitable Trust is long PG. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charity’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY OBLIGATION EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. 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In this photo illustration, Pantene and Head & Shoulders hair products are on display on July 28, 2023 in San Anselmo, California.
Justin Sullivan | Getty Images
Procter & Gamble Shares were down sharply in early Friday trading after the consumer products giant reported a mixed quarter. We viewed this action as a type of profit taking – not a reflection of results. The stock entered the session on a four-day winning streak while the broader market was falling. Late Friday, while the Dow went into the green, as did P&G shares.
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