A month has gone by since the last earnings report for Procter & Gamble (PG). Shares have added about 1.4% 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 Beats on Q2 Earnings, Sales Miss
Procter & Gamble reported second-quarter fiscal 2020 results, wherein earnings per share surpassed the Zacks Consensus Estimate. However, sales missed the consensus mark. Nonetheless, earnings and sales improved on a year-over-year basis. Moreover, the company raised its guidance for fiscal 2020.
Procter & Gamble’s core earnings of $1.42 per share improved 14% year over year and outpaced the Zacks Consensus Estimate of $1.37. Meanwhile, currency-neutral core earnings per share (EPS) grew 15%.
The company reported net sales of $18,240 million, improving 4.6% year over year. However, sales missed the Zacks Consensus Estimate of $18,339 million. Currency fluctuations hurt the top line by one percentage point.
Sales in Detail
On an organic basis (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 5% based on 3% rise in organic shipment volume. Further, organic sales benefited 1% each from increased pricing and favorable mix. The company mix benefited from strong organic sales growth in the Health Care segment as well as Skin and Personal Care categories, which have higher than company average selling prices.
Moreover, all of the company’s business segments reported organic sales growth. Organic sales improved 8% for the Beauty segment, 4% for Grooming, 7% for Health Care, 5% for Fabric & Home Care, and 1% for the Baby, Feminine and Family Care segment.
Net sales at Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine and Family Care segments grew 7%, 2%, 14%, 4% and 1%, respectively.
In the reported quarter, core gross margin increased 200 basis points (bps) year over year to 51.6%, including nearly 10 bps of adverse impact of foreign currency. On a currency-neutral basis, core gross margin expanded 210 bps, backed by gains from productivity savings, higher pricing, commodity cost declines and other benefits. This uptick was partly offset by unfavorable product mix.
Core and currency-neutral selling, general and administrative expenses (SG&A), as a percentage of sales, increased 20 bps to 26.9%. The increase was driven by higher marketing investments, inflation, digital investments, incentive compensation costs and other impacts. However, these were partly negated by savings from overhead and marketing expenses, and sales leverage benefit.
Moreover, core and currency-neutral operating margin expanded 190 bps to 24.7%, driven by 220 bps of total productivity cost savings.
Procter & Gamble ended the reported quarter with cash and cash equivalents of $6,279 million, long-term debt of $18,985 million, and total shareholders’ equity of $45,908 million.
Cash flow from operating activities amounted to $8,533 million for the first half of fiscal 2020, with operating cash flow of $4.4 billion in the fiscal second quarter. Moreover, adjusted free cash flow productivity was 100%.
Furthermore, the company returned $5.4 billion of cash to its shareholders in the fiscal second quarter. This included dividend payments worth $1.9 billion and share buybacks of $3.5 billion.
For fiscal 2020, the company increased its view for adjusted free cash flow productivity to 100% from 95% stated earlier. It anticipates paying out more than $7.5 billion in dividends and repurchasing $7-$8 billion of common shares in fiscal 2020. Earlier, the company had anticipated repurchasing shares worth $6-$8 billion.
Fiscal 2020 Guidance
Backed by strong organic sales growth, core earnings and returns to shareholders in the fiscal second quarter, Procter & Gamble raised its view for fiscal 2020. The company now projects all-in and organic sales growth of 4-5% compared with 3-5% mentioned earlier. The guidance includes a modest impact of adverse foreign currency, which is likely to be mostly offset by slight gain from acquisitions and divestitures.
Moreover, the company now projects core EPS growth of 8-11% for fiscal 2020 compared with 5-10% mentioned earlier. In fiscal 2019, it reported core earnings of $4.52 per share.
How Have Estimates Been Moving Since Then?
Estimates revision followed an upward path over the past two months.
At this time, P&G has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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.
P&G has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.