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It has been about a month since the last earnings report for Procter & Gamble (PG). Shares have added about 4.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is P&G due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Procter & Gamble Q1 Earnings & Sales Beat Estimates
Procter & Gamble posted better-than-expected first-quarter fiscal 2022 results. While sales improved year over year, earnings declined from the year-ago period. The better-than-expected results were driven by robust top-line growth across all segments, offset by a decline in the operating margin. Management reiterated its outlook for fiscal 2022.
The company’s predicts increased impacts from commodity and freight costs in fiscal 2022. It now expects higher commodity and freight costs to result in a $2.3-billion headwind on earnings, translating into a 90-cents impact on earnings per share (EPS).
Procter & Gamble’s earnings of $1.61 per share declined 1% from core earnings of $1.63 per share in the year-ago quarter. The decline can be attributed to the reduced operating margin due to higher-than-anticipated commodity and freight costs, which more than offset net sales growth. However, earnings outpaced the Zacks Consensus Estimate of $1.59. Currency-neutral net EPS declined 3%.
The company reported net sales of $20,338 million, increasing 5% year over year and surpassing the Zacks Consensus Estimate of $19,849 million. Sales growth was attributed to strength across all segments coupled with robust volume, pricing and mix. Favorable foreign currency aided sales by 1 percentage point.
On an organic basis (excluding the impacts of acquisitions, divestitures and foreign exchange), revenues improved 4%, backed by a 2% increase in the shipment volume and a 1% rise in pricing and a positive mix of 1%. The company reported a positive mix, owing to uneven volume growth in North America, the Health Care business and premium products, all of which have higher selling prices than the company average. Shipment volumes were aided by superior products and innovation, offset by a higher base period in some markets due to the rebuilding of inventories by retailers.
Net sales for the Beauty, Grooming and Fabric & Home Care segments increased 5% each. The Health Care, and Baby, Feminine & Family Care segments reported sales growth of 8% and 3%, respectively. All of the company’s business segments reported growth in organic sales. Organic sales moved up 2% each in Beauty, and Baby, Feminine & Family Care; 7% in Health Care; 4% in Grooming; and 5% in Fabric & Home Care.
In the reported quarter, the gross margin contracted 370 basis points (bps) to 49%. Currency had a 0.2% negative impact on the gross margin. The currency-neutral gross margin declined 390 bps. The decline in the gross margin was mainly due to an 80-bps impact from an unfavorable mix, 350 bps of commodity cost inflation, a 50-bps increase in transportation costs, and 60 bps from product and packaging investments, and other impacts. This was partly negated by 100 bps of gross manufacturing productivity savings (50 bps net of increase in freight costs) and 50 bps of pricing gains.
Selling, general and administrative expenses (SG&A), as a percentage of sales, declined 100 bps from the year-ago quarter to 24.3%. Adverse currency increased SG&A expenses by 10 bps. SG&A expenses declined 110 bps on a currency-neutral basis, owing to 80 bps of savings from overhead and marketing expenses, 100 bps of cost leverage gains due to higher sales, and 40 bps of gain from the sale of real estate. This was partly offset by a 90-bps increase in marketing investments, and 20 bps of wage inflation, net of other impacts.
The operating margin declined 260 bps from the prior-year to 24.7%. Unfavorable currency hurt the operating margin by 10 bps. On a currency-neutral basis, the operating margin contracted 270 bps. The headwinds were partly offset by 180 bps of productivity cost savings (130 bps net of higher transportation costs).
Procter & Gamble ended the reported quarter with cash and cash equivalents of $10,370 million, long-term debt of $20,558 million, and total shareholders’ equity of $46,408 million.
The company generated an operating cash flow of $4,643 million in first-quarter fiscal 2022 and adjusted free cash flow of $3,777 million. Adjusted free cash flow productivity was 92% in the fiscal first quarter.
The company returned $4,932 million in cash to its shareholders in the fiscal first quarter. This included $2,182 million of dividend payouts and $2,750 million of share buybacks.
Fiscal 2021 Guidance
Management reiterated its guidance for fiscal 2022. The company anticipates all-in and organic sales growth of 2-4% each. Currency movements are now expected to be neutral to all-in sales growth in fiscal 2022.
EPS, on a reported basis, is expected to increase 6-9%, whereas the company reported $5.50 in fiscal 2021. Core EPS for fiscal 2022 is anticipated to grow 3-6% from $5.66 earned in fiscal 2021. The earnings view takes into account an after-tax headwind of $2.1 billion from higher commodity costs and $200 million from higher freight costs. Commodity and freight costs are likely to hurt fiscal 2022 EPS by 90 cents per share on a combined basis. Currency is expected to be neutral to EPS in fiscal 2022.
The company projects a core effective tax rate of 18-19% for fiscal 2022. It expects capital expenditure of 4-5% of net sales in fiscal 2022.
Adjusted free cash flow productivity is estimated to be 90% for fiscal 2022. The company expects to remain committed to returning cash to shareholders in fiscal 2022. It plans to make dividend payments of $8 billion along with share repurchases of $7-$9 billion in fiscal 2022.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
At this time, P&G has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, P&G has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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