Procter & Gamble earnings: Frigid sales and margins don’t suggest cracks in its standing
North America was a notable blemish, down 2% on an organic basis.
Mentioned: Procter & Gamble Co (PG)
Key Morningstar metrics for Procter & Gamble
- Fair Value Estimate: $148.00
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Low
What we thought of Procter & Gamble’s earnings
Procter & Gamble’s PG fiscal second-quarter sales languished as 1% higher prices were offset by 1% lower volume. Despite a 160-basis-point benefit from cost savings, the combination of unfavorable mix, tariffs, and reinvestment capped the firm’s adjusted gross margin at 51.2%, down 30 basis points year over year.
Why it matters: While consumer spending remains weak, the geopolitical environment is uncertain, and the competitive backdrop is intense, we view P&G’s long-standing focus on extracting inefficiencies to fuel brand spending as a prudent strategic path.
- This report was CEO Shailesh Jejurikar’s first since taking over from Jon Moeller. We sense he intends to hone efforts to drive productivity and rightsize the company’s category and geographic reach, which strikes us as judicious.
- In the long term, we forecast 13.0% of sales to be directed to research, development, and marketing and 4.3% to capital expenditures (both generally in line with history) as the firm scales its capabilities and platform investments from the past few years while strengthening its value proposition.
The bottom line: We don’t expect to make any material changes to our $148 fair value estimate for wide-moat P&G, rendering the shares fairly valued.
- However, we wouldn’t require a significant margin of safety before recommending that investors add this competitively advantaged name to their shopping carts.
Between the lines: North America was a notable blemish, down 2% on an organic basis. This lagged the broader market’s 1%-2% growth.
- Management was forthright about its challenges. We think it can double down on consumer-valued innovation and marketing to support its brand health, which should boost sales in time.
- These steps mimic actions taken over the past few years in China, where P&G is now boasting market share gains—posting 3% organic growth versus a 1% pullback in its categories—even as the consumer landscape remains grim.
