P&G Witnesses Balanced Risk-Reward: Stock Up 31.2% In A Year
Zacks Investment Research | Apr 03, 2019 07:39AM ET
The Procter & Gamble Company (NYSE:PG) , popularly known as P&G, displayed immense strength on the back of initiatives that include product improvement, packaging & marketing, and productivity and cost savings. These efforts have not only aided quarterly outcome but also boosted share price, with gains of 31.2% recorded in the past year. This performance is well ahead of the industry ’s growth of 15.6% in the same period.
However, like all consumer goods companies, P&G is suffering from a graph of 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 branded consumer products company will retain stock momentum.
Factors Likely to Aid Stock Performance
We believe the aforementioned initiatives should provide enough support to maintain the momentum in the Procter & Gamble stock. Going into details, the company remains focused on productivity and cost-saving plans to boost margins, thereby lifting the profit level. Its continued investment in business alongside efforts to offset macro cost headwinds and balance top and bottom-line growth underscores 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. The second five-year restructuring plan targets $7 billion in COGS savings ($4.5 billion from raw and packaging materials, $1.5 billion in manufacturing savings, and $1 billion from transportation/warehousing/other); $2 billion of marketing cost reductions; $1.5 billion of trade spending savings (10% efficiency); and $1-$2 billion of additional overhead reductions.
Additionally, the company’s efforts to enhance the product portfolio by acquiring complementary businesses have been key highlights. Some of its recent acquisitions include the beauty brand — First Aid Beauty — for $250 million in July 2018, and the consumer health business of Germany-based Merck KGaA (for $4 billion) and Walker & Company Brands in December 2018.
Simultaneously, the company divested several assets over the years as part of the portfolio-reshaping plan. The most prominent among these is the sale of four product categories, comprising 41 beauty brands, to Coty in 2016. Other divestitures include P&G’s snacks unit — Pringles; the global bleach business, the Braun household appliances business, pet care businesses in America, Asia and Europe; and the Duracell batteries business.
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These actions have been the key to the company’s robust quarterly performance over the years, having recorded earnings beat for 15 straight quarters and sales beat in five of the last six quarters. Backed by these initiatives, it anticipates continued improvement in organic sales in the years ahead. As a result, the company raised the upper end of the fiscal 2019 organic sales guidance by 1%. Organic sales are now estimated to increase 2-4%. Further, it now expects all-in sales to be down 1% to up 1% in fiscal 2019 versus previously mentioned 2% decline to flat.
Factors to Hinder Growth
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. Additionally, the company’s significant international presence exposes it to foreign currency risks, which have been weighing on performance. Although its cost-saving initiatives are contributing meaningfully to margin expansion, this is not enough to negate ongoing headwinds.
While pricing gains slightly cushioned negative margin trends in second-quarter fiscal 2019, the company expects currency headwinds, higher business investments, commodity costs and competition to weigh on margins in the near term. Commodity costs are likely to impact earnings by nearly $400 million in fiscal 2019 while trucking costs are anticipated to increase 25% or more from the last year.
Further, the company’s all-in sales guidance includes currency impacts of nearly 3-4%. Earnings guidance also includes an adverse impact of nearly $1.4 billion from foreign currency, and escalated commodity and transportation expenses. Of this, currency headwinds on earnings are likely to be about $900 million.
Conclusion
The above discussion clearly shows that Procter & Gamble has balanced risk-reward, with its progress on efforts to offset hurdles. Further, the company’s Zacks Rank #3 (Hold) and expected long-term earnings growth rate of 6.9% speak well of its growth potential.
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