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P&G (PG) Up 5.6% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Procter & Gamble (PG). Shares have added about 5.6% in that time frame, underperforming 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 its most recent earnings report in order to get a better handle on the important catalysts.

Procter & Gamble Q4 Earnings & Sales Beat Estimates

The Procter & Gamble’s, popularly known as P&G, reported impressive fourth-quarter fiscal 2020 results. Further, both top and bottom lines improved year over year. Results gained from a sudden spike in demand for household cleaning, personal health and cleansing products, mostly in North America and China, stemming from the ongoing COVID-19 pandemic.

Procter & Gamble’s core earnings of $1.16 per share rose 5% year over year and outpaced the Zacks Consensus Estimate of $1.01 on the back of sturdy sales growth and improved operating margin. Meanwhile, currency-neutral core earnings per share (EPS) increased 11%.

The company reported net sales of $17,698 million, increasing 4% year over year and surpassing the Zacks Consensus Estimate of $16,952 million. The company mix to net sales growth was 1% year over year.

Sales in Detail

On an organic basis (excluding the impact of acquisitions, divestitures and foreign exchange), revenues moved up 6% based on a 3% rise in organic shipment volume. Further, sales inched up 2% owing to higher pricing.

Moreover, all of the company’s business segments, except Grooming, reported growth in organic sales. Organic sales moved up 3% in the Beauty segment, 2% in Health Care, 14% in Fabric & Home Care and 5% in the Baby, Feminine and Family Care segment. However, the metric declined 1% in the Grooming division.

Net sales in the Fabric & Home Care, and Baby, Feminine and Family Care segments rose 11% and 3%, respectively. However, net sales in the Health Care and Grooming segments declined 1% and 5%, respectively. For the Beauty segment, sales remained flat year over year.

Margins

In the reported quarter, core gross margin expanded 210 basis points (bps) year over year to 49.5%, including 40 bps of adverse impacts of foreign currency. On a currency-neutral basis, core gross margin expanded 250 bps owing to benefits from gross productivity savings, higher pricing and commodity cost declines. The uptick was partly offset by unfavorable product mix, manufacturing and logistics expenses and other headwinds.

Core selling, general and administrative expenses (SG&A), as a percentage of sales, increased 70 bps to 29.8%. The metric expanded 50 bps on a currency-neutral basis. This can be attributable to gains from the sale of real estate, increased marketing investments, rise in costs related to wage inflation and incentive compensation. These factors were more than offset by savings related to overhead and marketing expenses.

Moreover, core operating margin expanded 140 bps. On a currency-neutral basis, the metric improved 190 bps, driven by 440 bps of total productivity cost savings.

Financials

Procter & Gamble ended the reported quarter with cash and cash equivalents of $16,181 million, long-term debt of $23,537 million and total shareholders’ equity of $46,878 million.

Cash flow from operating activities amounted to $17,403 million for fiscal 2020, with operating cash flow of $4.8 billion in the fiscal fourth quarter. Moreover, free cash flow productivity was 114%.

Furthermore, the company returned $15.2 billion of cash to its shareholders in fiscal 2020. This included dividend payouts worth $7.8 billion and share buybacks of $7.4 billion.

Fiscal 2021 Guidance

Management issued fiscal 2021 guidance. Notably, the company anticipates sales growth of 1-3%, with organic sales growth of 2-4%. Unfavorable currency is expected to affect sales by 1% in fiscal 2021. Apart from these, capital expenditure is envisioned to be 4-5% of fiscal 2021 sales.

Further, earnings on a reported basis are likely to witness growth of 6-10%. Core earnings for fiscal 2021 are projected to grow 3-7%. This view takes into account an after-tax headwind of $300 million due to currency woes, which are likely to be more than offset by a $275-million after-tax benefit related to reduced commodity costs. Also, elevated interest costs and soft interest income to the tune of $150 million are expected to hurt fiscal 2021 results.

Adjusted free cash flow productivity is estimated to be 90%. In addition to this, the company anticipates dividend payments of $8 billion and share repurchases of $6-$8 billion in fiscal 2021.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, P&G has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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