uploads///Procter Gamble

Procter & Gamble Will Likely Beat Q4 Estimates


Jul. 24 2019, Updated 8:18 a.m. ET

  • Procter & Gamble is scheduled to announce its fourth-quarter results on July 30.
  • Higher net selling prices and a favorable product mix will likely drive Procter & Gamble’s organic sales. Premium innovation and strength in the US and China will likely support the company’s sales.
  • Procter & Gamble has a strong history of beating analysts’ EPS estimate.

Procter & Gamble (PG) is scheduled to announce to its fourth-quarter earnings on July 30. We expect the company to beat analysts’ estimates due to sustained momentum in organic sales. Meanwhile, lower taxes and share buybacks will likely drive the company’s earnings.

Procter & Gamble’s underlying sales will likely record healthy growth due to balanced growth in the net selling price and volumes. A favorable product mix will likely support the company’s organic sales.

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Notably, innovation and price restructuring are driving household and personal care product manufacturers’ organic sales. On July 23, Kimberly-Clark (KMB) reported better-than-expected second-quarter results due to higher net pricing. Kimberly-Clark’s organic sales rose 5%, which reflected a 5% increase in pricing and a 1% benefit from the product mix. Meanwhile, we expect Colgate-Palmolive’s (CL) organic sales to benefit from higher net price realization in the second quarter.

We expect Procter & Gamble’s margins to benefit from higher organic sales and productivity savings. However, an unfavorable mix and commodity costs could remain a drag.

Despite pressure on the margins, Procter & Gamble’s adjusted EPS will likely have stellar growth due to share buybacks and the lower effective tax rate.

Analysts’ consensus estimates 

Analysts expect Procter & Gamble to report revenues of $16.86 billion, which implies growth of 2.2% YoY (year-over-year). Improved organic sales will likely support the company’s top-line growth. However, unfavorable currency exchange rates could be a drag. Notably, fluctuating currency exchange rates had a negative impact of 5% on Kimberly-Clark’s sales growth.

Analysts expect Procter & Gamble to post an adjusted EPS of $1.05, which implies growth of 11.7% YoY. A significant decline in the core effective tax rate and share repurchases will likely drive Procter & Gamble’s bottom line.

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Procter & Gamble’s growth drivers 

Procter & Gamble’s organic sales rose 5% during the last quarter. Meanwhile, organic sales registered 4% growth in the first half of fiscal 2019. Higher net selling prices and premium innovation have been the main catalysts behind the company’s stellar sales. The US and China, two of the company’s largest markets, recorded phenomenal growth. We expect Procter & Gamble’s organic sales to continue to benefit from higher pricing due to premium innovation. Also, the company’s volumes are expected to improve.

However, the volumes in the grooming and baby care segment could stay low, which would reflect higher pricing amid heightened competitive activity.

The company beat analysts’ EPS estimates in the last 16 quarters despite cost headwinds. Increased productivity savings and higher pricing helped offset some of the cost headwinds. However, the lower effective tax rate and share repurchases cushioned the company’s bottom line.

We expect Procter & Gamble’s bottom line to mark strong growth in the fourth quarter. Higher organic sales, productivity and cost savings, and share repurchases will likely drive the company’s EPS. An expected YoY decline in the core tax rate should support the company’s earnings growth. Meanwhile, cost headwinds and currency volatility could continue to hurt the bottom-line growth.

Stock performance

So far, Procter & Gamble stock has outperformed the benchmark index this year. The stock has risen 23.9% on a YTD basis as of July 23. In comparison, the S&P 500 has increased 19.9% during the same period. Continued strength in the base business has driven the stock price.

We expect moderation in input costs and margin expansion to support the company’s stock price in the coming quarters. However, valuation could limit the upside. Procter & Gamble stock is trading at a forward PE ratio of 24.3x, which doesn’t look attractive given the projected EPS growth of 6.2% in fiscal 2020.

Among the 23 analysts covering Procter & Gamble stock, 12 recommended a “buy,” ten recommended a “hold,” and one recommended a “sell.” However, the consensus target price of $109.85 per share implies a downside of 3.5% based on the closing price of $113.85.


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