Source: PaxForex Premium Analytics Portal, Fundamental Insight
It may be an opportune moment to rekindle your interest in Procter & Gamble stock. The consumer goods giant recently unveiled robust quarterly earnings results, characterized by a rapid surge in organic sales and expanding profit margins.
When examining beyond the surface, we can discern both encouraging and less favorable trends that investors should monitor while contemplating the inclusion of this dividend powerhouse in their portfolios. Let's delve deeper into these dynamics.
One of the primary concerns in recent quarters has been P&G's heavy reliance on price hikes to propel its growth. While this strategy showcases valuable pricing power, it may not be sustainable over extended periods. With the subsiding of inflation projected into late 2023, P&G might find its capacity to continue raising prices limited.
On a brighter note, volume trends remain resilient. Sales volume saw only a 1% decline across the portfolio this quarter, mirroring the previous quarter's dip and keeping P&G within reach of a return to growth.
A notable 7% surge in average prices, combined with a 1% benefit from heightened demand for premium products, led to an impressive 7% upturn in overall organic sales. This performance exceeded management's short-term expectations, as CEO Jon Moeller emphasized, "We delivered very strong results" in a press release.
Another positive sign emerges from P&G's improving financial health. The company has consistently excelled in this aspect. Last year, its profit margin was nearly 10 percentage points higher than that of its competitor, Kimberly-Clark. Furthermore, P&G boasts remarkable efficiency in converting nearly all of its earnings into free cash flow.
Moreover, the company's profit trends are on an upswing. Cost-cutting measures and price hikes have contributed, but P&G is also benefiting from the decline in commodity costs. Following a year-long spike, inflation in many key materials is subsiding, resulting in a 3% boost in operating profit margin, even after factoring in currency exchange rate fluctuations. Notably, net earnings per share surged by a robust 17% through late September.
These predominantly positive trends prompted management to provide a somewhat more optimistic outlook for the 2024 fiscal year. Sales are poised to reach the upper end of P&G's projections, calling for organic revenue to grow by as much as 5% this year, following the 7% spike in the previous year. While the earnings outlook remained steady, it's largely due to foreign exchange rate shifts balancing out the nearly $1 billion reduction in commodity costs, which is driving profit growth.
These developments do not signal an immediate return to the type of substantial earnings growth witnessed during most of the pandemic. P&G still faces challenges, with consumer spending being more subdued compared to the previous year. However, there is a strong likelihood that volume growth will rebound soon, especially as the pressure to continuously raise prices eases. When combined with cost-cutting initiatives, earnings are well-positioned for sustained growth in 2024 and beyond.
This is why the stock currently appears more appealing. It is valued at 4.5 times annual sales, down from 5.5 times sales earlier this year. A similar discount is observed in the P/E ratio, which has decreased from 30 at the beginning of the year to 25. Adding to its allure is the company's 2.5% dividend yield, making P&G an attractive choice for long-term investors.
As long as the price is above 144.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 149.79
- Take Profit 1: 154.00
- Take Profit 2: 158.00
Alternative scenario:
If the level of 144.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 144.00
- Take Profit 1: 142.00
- Take Profit 2: 139.00
