Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors are wary of an impending recession, a time when Wall Street tends to flock to reliable dividend payers like Procter & Gamble. This giant of the consumer sector has survived many recessions over the decades because of its market dominance and a huge portfolio of critical brands and products.
But P&G stock has struggled to keep up with the market, falling about the same 22% as the S&P 500 by mid-October. It's even lagging behind its smaller rival Kimberly-Clark. Let's take a look at why investors are cautious about Procter & Gamble stock, and whether this price decline is a good buying opportunity.
In its latest earnings report, P&G presented investors with mixed data about its business. Sure, organic sales were up 7% in the fourth fiscal quarter, matching the healthy growth rate of the broader fiscal year that ended at the end of June. But if you look beyond that major growth metric, you can see a few problem areas.
Sales were down in three of P&G's five major segments and flat in the other two. Thus, the company achieved all of its organic growth through price increases. While this fact reflects P&G's pricing power, the company would have preferred to increase sales by balancing price increases with sales volume increases. Lower sales volumes mean that customers are cutting back and switching to higher-priced brands.
Profitability is also declining despite higher prices. Over the past 12 months, P&G has increased profits by only 3%, less than half the rate of sales growth. That's still better than Kimberly-Clark, which reported a decline in core profits in the last quarter.
Both companies are predicting that things will get worse before they get better. "We expect another year of significant downside," P&G CEO John Moeller said in late July. Management predicts organic sales growth will slow to 3-5% this year, mostly due to higher prices. Profits will also decline, by about 2%.
Investors are concerned that these forecasts may be lowered when P&G reports operating results for its first fiscal quarter on Oct. 19. Although supply chain problems have eased, inflation has remained stubbornly high in recent months and economic growth has slowed in key markets such as the U.S. and China.
The prospect of weak sales and earnings growth next year explains the drop in P&G stock. But there are good reasons to be optimistic about the long-term outlook. The company is likely to win market share and generate healthy earnings and cash flow.
It will also return more than $15 billion to shareholders through stock repurchases and dividend payments. This dividend, which currently yields nearly 3 percent, has been growing steadily for more than 60 years and will likely continue to do so during a possible recession.
As a result, investors may want to take a closer look at P&G stock. In exchange for an unstable few quarters ahead, you can own this stellar business at a big discount from the valuation Wall Street was giving just a few months ago. Taking advantage of general market pessimism is usually a good strategy for boosting long-term profits, especially in the case of stable, world-class companies like Procter & Gamble.
As long as the price is below 135.00, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 129.42
- Take Profit 1: 126.00
- Take Profit 2: 122.00
Alternative scenario:
If the level of 135.00 is broken-out, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 135.00
- Take Profit 1: 141.00
- Take Profit 2: 147.00
