Procter & Gamble Q3 Earnings Review
Apr. 23, 2019 Article

P&G's Stock Down Despite Strong Growth

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Procter & Gamble’s (P&G) third quarter results showed continued topline momentum with 5 percent organic growth, a level not seen since fiscal 2011. In addition, P&G grew or held market share in 33 of its top 50 country-category combinations, up from 26 in 2018. Despite the strong growth and progress on market share, the stock was down 2.7 percent the day of the report. We attribute the negative reaction to a mix of elevated expectations (the stock was up nearly 17 percent YTD before the report), disappointing operating margin performance (more on this later) and management maintaining their wide range for fiscal year 2019 EPS guidance. The EPS guidance was a concern for many because P&G increased their guidance for organic revenues to “a solid 4 percent” from 2-4 percent, which most would expect to translate into higher earnings, or at a minimum, expect it to increase the low end of the range of expectations for earnings.

At a high level, there was a lot to like in the report, and we came away with more confidence that the fundamental backdrop for P&G is getting better. Revenue growth was driven by a combination of better pricing, mix and volume, which points to, in our opinion, a more robust, sustainable growth algorithm. Industry dynamics appear to be improving with increased market growth, healthy pricing and less promotional activity. Margins did come in below expectations but were driven by an increase in marketing spend and elevated costs due to the integration of the Merck OTC business. Foreign exchange and commodities were also a drag on margins. The Merck related costs should dissipate over time (and eventually drive synergies) and we feel the elevated marketing spend is likely a good use of capital to drive growth. There were some weak points in the quarter with Grooming and Baby both a drag on results. Increased investments to drive awareness and trial of the new SkinGuard product and upcoming innovation in diapers to offer a superior experience across the pricing ladder are expected to improve performance in these areas.

What’s next? P&G is expected to give fiscal 2020 guidance next quarter. Management tempered expectations a bit by pointing out that they expect a strong competitive response to their recent success and given the strong year they’ve had in 2019, 2020 will be dealing with more difficult comparisons. Also, they expect a fairly wide top and bottom line guidance range. Going forward we expect the debate around P&G stock to center around their ability to manage the tradeoff between increasing margins and investing in the business to sustain top line momentum.

 

Stock performance sources: Factset
Other sources: P&G earnings conference call transcripts and P&G earnings report

Mariner Wealth Advisors is not affiliated with Procter & Gamble. Any reference to them should not be construed as an endorsement by either party.

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