Strength in underlying business likely to sustain
Procter & Gamble (PG) has impressed with its financial performance in the first half of fiscal 2019 thanks to improved underlying sales. Higher net price realizations, innovation-led products, and favorable mixes have been driving its organic sales and, in turn, its EPS. Meanwhile, productivity savings, a lower effective tax rate, and share repurchases are cushioning its bottom line despite heightened cost pressures.
A fall in the effective tax rate has been driving the bottom lines of consumer packaged goods manufacturers such as Kimberly-Clark (KMB), Colgate-Palmolive (CL), Church & Dwight (CHD), and the Clorox Company (CLX). However, inflation in input costs and higher logistics costs continue to take a toll on their profitabilities.
Procter & Gamble’s margins have remained low for the past several quarters. However, the company has managed to exceed analysts’ EPS expectations for the past 15 consecutive quarters, which is commendable given the inflationary cost environment.
We expect Procter & Gamble’s price-restructuring initiatives to drive its organic sales in the second half of fiscal 2019. A favorable mix, strength in the skincare and personal care categories, and premium innovations are likely to drive its underlying sales.
However, the company’s top line growth could remain low, as benefits from higher organic sales are expected to be offset by adverse currency rates. Meanwhile, cost headwinds and increased competitive activity in the value segment are expected to limit its EPS growth.
Procter & Gamble stock is up 8% so far this year and has outperformed the majority of its peers except for Colgate-Palmolive, which is up 10.8% as of February 13. Kimberly-Clark and the Clorox Company stock are up 1.9% and 1.4%, respectively, YTD (year-to-date). Meanwhile, Church & Dwight stock is down 1.4% YTD. The S&P 500 has risen 9.8% during the same period.