Procter & Gamble: Fiscal 2020 Could Start Strong

Procter & Gamble could start fiscal 2020 on a high note.

  • Balanced growth in volumes and pricing could drive organic revenues. Further pressure on margins could ease.
  • The company plans to announce its earnings for Q1 of fiscal 2020 on October 22.

Procter & Gamble earnings: Q1 to sustain momentum

Procter & Gamble (PG) impressed with its stellar financial performance in fiscal 2019. The company’s organic sales grew at a robust pace. While its first-half organic sales increased by 4%, the second half was even better. Notably, Procter & Gamble posted organic sales growth of 7% in the fourth quarter of fiscal 2019—its best growth in more than a decade.

Exceptional underlying sales growth and productivity savings drove its earnings higher, which continued to beat Wall Street’s expectations. Procter & Gamble has surpassed analysts’ EPS consensus estimates in the last 17 consecutive quarters. On average, the company exceeded expectations by 4%, which is encouraging.

Stellar financial performance drove Procter & Gamble stock higher. Procter & Gamble stock was up 27.9% on a year-to-date basis on October 16 and outperformed the broader markets by a wide margin.

We think Procter & Gamble could sustain growth momentum and start fiscal 2020 on a high note. Analysts’ consensus estimates indicate that Procter & Gamble’s first-quarter revenues and EPS could grow at a healthy rate.

Balanced growth in both pricing and volumes are expected to drive Procter & Gamble’s organic revenues. Meanwhile, pressure on margins could ease. Plus, its margins could gain from higher underlying sales, productivity savings, and moderating input cost trends.

Growth in revenues and margin expansion are expected to drive Procter & Gamble’s earnings in the first quarter.

Procter & Gamble’s earnings: What analysts expect

Procter & Gamble plans to announce its Q1 of fiscal 2020 earnings on Tuesday, October 22. Wall Street expects Procter & Gamble to post revenues of $17.43 billion in the first quarter, reflecting year-over-year growth of 4.4%. An increase in volumes, higher pricing, and favorable mix could support its revenues, and organic sales could drive its premium innovation.

In particular, the beauty category could continue to outperform, driven by the super-premium SK-II brand and Olay Skin Care. However, the grooming segment’s volumes could stay low with volume declines and market contraction in shave care products.

Notably, the organic sales of other significant household and personal care product manufacturers could also gain from higher net pricing. Moreover, moderation in commodity costs and cost savings could support margins. Analysts expect Kimberly-Clark (KMB) and Colgate-Palmolive’s (CL) top lines to benefit from higher net price realization.

Procter & Gamble’s third-quarter core profit margins could expand on the back of productivity savings. Analysts expect Procter & Gamble to post adjusted EPS of $1.24, up about 11% YoY.

What’s next for PG stock?

Despite healthy growth expectations, the upside in Procter & Gamble stock could be limited. Shares of Procter & Gamble have risen about 28% YTD, reflecting the company’s positive developments. Moreover, the company’s current valuation looks a bit stretched. Procter & Gamble stock trades at a forward earnings multiple of 23.7x, which looks expensive on projected EPS growth of 7.3% in fiscal 2020.

Analysts have a price target of $124 on Procter & Gamble stock, which implies an upside of about 6%, based on its closing price of $117.53 on October 16.

Among the 24 analysts covering PG stock, 12 analysts recommend a “buy,” 10 analysts suggest a “hold,” and two analysts gave a “sell” rating.