Procter & Gamble (PG) Bounces Back On Strong DecQ Earnings Results
2:29 pm Wednesday, January 19th, 2022
Procter & Gamble (NYSE:PG) is bouncing back on solid Q2 (Dec) earnings results today. The consumer goods mammoth, which owns numerous brands such as Gillette, Pampers, and Bounce, may have only eked out a slight earnings beat and grown revenues at a typical mid-single-digit pace. However, PG also reaffirmed its FY22 EPS guidance of +3-6% yr/yr and raised the low end of its revenue guidance to +3-4% yr/yr from +2-4%. Even better, PG also upped its FY22 organic sales growth to +4-5% yr/yr from its prior guidance for growth of just +2-4%. Although PG’s outlook may not seem like much, it stands head and shoulders above the rest when viewed against the backdrop of intensifying inflationary pressures.
Inflationary headwinds increased once again in Q2. PG now expects $2.6 bln of higher commodity and freight costs in FY22, up from $2.3 bln in Q1 (Sep) and significantly higher than the company’s initial forecast of $1.8 bln in Q4 (Jun). When combining the updated $2.6 bln with an additional $200 mln from unfavorable foreign exchange impacts, the total $2.8 bln in headwinds translates to a $1.10 per share hit to FY22 earnings versus FY21.
Nonetheless, PG was able to retain its prior guidance while even raising it slightly in some cases, largely as a result of the company’s strong pricing power. PG has continued to involve more product categories into its price hike strategy, including mid-tier liquid detergents this quarter, bringing higher prices to most of its product line.
Due to the defensive nature of the products, the higher prices have not caused a major disruption in demand for PG’s products, as each of the company’s six segments saw meaningful growth yr/yr in Q2. The standout was the Health Care and Fabric and Home Care segments growing organic sales 8% each yr/yr. Within those businesses, both personal health care and fabric care saw double-digit growth due to a more intense cough/cold/flu season and higher detergent and fabric volumes.
Overall, PG’s continual gamble on hiking prices is paying off. The company reaffirmed its FY22 EPS guidance and raised its total and organic sales growth forecast. Given the necessity of PG’s products and their competitive advantage over off-label alternatives, the price action has yet to deter buyers. We think buyers will gravitate toward a lower-tiered name brand product before shifting entirely to an off-label one, especially when it comes to daily use categories like health and hygiene. PG can also compete quite well with cheaper substitutes given the broad range within its portfolio, offering its own affordable and premium products.
Bottom line, after a brief cool-down period for PG’s shares, which had fallen by about 4% on the year before Q2 earnings, a bounce-back has quickly manifested. Given PG’s consumer defensive product portfolio, consistent dividend that currently sits at 2.1%, and robust share repurchase program, now at $9-10 bln in FY22 (up from $7-9 bln last quarter), the company acts as a solid alternative to higher-multiple tech stocks that are falling out of favor due to increasing interest rates.
On a final note, PG’s strong earnings results today bode well for its competitors Johnson & Johnson (JNJ) and Kimberly Clark (KMB), which report earnings on January 25 and 26, respectively.
