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Why Procter & Gamble Stock Might Not Cool Off

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  • Procter & Gamble stock has risen 33.8% YTD.
  • Expect a stellar financial performance to support the upside.
  • Analysts raised the target price in anticipation of more upside.
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Will Procter & Gamble stock still be hot?

So far, Procter & Gamble stock has outperformed the broader markets by a wide margin. Procter & Gamble stock has risen 33.8% on a YTD (year-to-date) basis as of Wednesday. Meanwhile, the S&P 500 grew close to 20%.

There’s an uptrend in Procter & Gamble (PG) stock for a good reason. The company posted stellar organic sales growth in the past five quarters. Procter & Gamble outpaced its peers by a significant margin. The company’s growth was broad-based with balanced growth in volumes and pricing. In contrast, Kimberly-Clark (KMB) and Colgate-Palmolive (CL) posted better organic sales growth. However, underlying sales were mainly driven by higher net pricing, while they continue to struggle on the volume front.

Procter & Gamble’s organic sales increased 4% in the first half of fiscal 2019. Meanwhile, the organic sales growth accelerated in the back half of the last fiscal year. Procter & Gamble’s organic sales rose 5% in the third quarter and 7% in the fourth quarter.

Despite tough comparisons, the company sustained the momentum and posted 7% organic sales growth in the first quarter of fiscal 2020. Procter & Gamble’s organic sales gained from a 4% rise in volumes, a 1% increase in pricing, and a 2% gain in the product mix.

Analysts are upbeat 

Procter & Gamble’s impressive financial performance led several analysts to raise their target price on its stock. Here’s how the analysts made upward revisions:

  • Wells Fargo increased the target price to $136 from $135.
  • Jefferies has a target price of $128—up from $123.
  • Evercore ISI increased it to $140 from $130.
  • J.P. Morgan raised it to $139 from $136.
  • RBC increased the target price to $111 from $105.
  • Credit Suisse raised it to $125 from $117.
  • Macquarie increased it to $138 from $132.
  • UBS increased its target price to $126 from $122.
  • Stifel raised the target price to $119 from $117.
  • Morgan Stanley increased it to $134 from 130.
  • Citigroup raised it to $138 from $136.

Analysts have a consensus target price of $127.95 on the stock, which implies an upside of about 4% based on its closing price of $123 on Wednesday.

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Uptrend in Procter & Gamble stock will likely continue

We expect Procter & Gamble’s organic sales to continue to grow at a strong pace in the coming quarters. Although tough comparisons could limit growth in the second half, premium innovation will likely support growth.

Further, Procter & Gamble’s margins have started to look good. The company managed to expand its margins in the last two quarters, which is encouraging. We expect leverage from sales and favorable cost trends to support the company’s margins in the short term.

Moreover, Procter & Gamble continues to crush analysts’ estimates on the earnings front. The company beat analysts’ EPS estimates in the last 18 quarters with an average positive surprise of about 5%. We think that Procter & Gamble could continue to beat analysts’ expectations due to strength in its base business and productivity and cost savings.

The company continues to return a significant amount of cash to shareholders through higher dividends and share repurchases. For fiscal 2020, Procter & Gamble remains upbeat. The company expects to return $7.5 billion to its shareholders in the form of dividends. Also the company plans to repurchase $6 billion–$8 billion worth of shares.

Recent performance

Procter & Gamble started fiscal 2020 on a stellar note and beat analysts’ estimates. The company’s first-quarter revenues of $17.80 billion rose 7% YoY (year-over-year) and beat analysts’ consensus estimate of $17.42 billion. The core EPS was $1.37—up 22% YoY. Notably, the core EPS beat analysts’ estimate of $1.24.

In comparison, Kimberly-Clark’s bottom line beat analysts’ expectations due to higher pricing and margin expansion. Also, share repurchases drove the bottom line. However, weak volumes and higher taxes remained a drag on Kimberly-Clark’s bottom line. The company’s top line was roughly in line with the estimates and increased about 1%.

Analysts’ consensus estimate indicates that Colgate-Palmolive’s revenues will increase. Higher net pricing will likely drive the company’s top line. However, analysts expect Colgate-Palmolive to have disappointing earnings. The company’s adjusted EPS will likely decline in the third quarter.

After a stellar first-quarter performance, Procter & Gamble also raised its fiscal sales and earnings outlook, which will likely support its stock.

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