Inflating Cost Pressures Could Curb P&G's Trajectory

Despite the hype around sales the past few quarters, much consternation has more recently centered on how this growth would hold up as consumer product manufacturers begin to lap the extreme consumer stock-ups a year ago (which resulted in double-digit growth in a number of categories throughout the grocery store). Against this backdrop, we view wide-moat Procter & Gamble’s PG 4% organic sales marks as impressive (particularly when juxtaposed to the 6% uptick last year), which we attribute to strategic actions taken long before COVID-19 took hold (streamlining its brand mix and taking a more holistic approach to brand investing).

But even as its top line appears healthy, P&G now faces unrelenting commodity cost inflation that management qualitatively pegged as one of the more significant in some time. In response, P&G intends to implement mid- to high-single-digit price increases across its U.S. baby, feminine, and adult incontinence segments this fall. This follows similar sentiment offered by narrow-moat Kimberly-Clark last month. We’re cognizant consumers could balk at price hikes by trading down or out of certain categories. However, we surmise the degree of inflation combined with P&G’s innovation mandate (rooted in consumer-valued new fare) should make such increases more palatable. As evidence, pricing has only detracted from its top line once in the past 16 years.

With just three months left in its fiscal 2021, P&G affirmed its full-year outlook (5%-6% organic sales and 8%-10% adjusted EPS growth), which squarely aligns with our pre-print forecast (5.6% and 9.4%, respectively). As such, we aren't altering our $117 fair value estimate (beyond a low-single-digit bump for time value) or our long-term outlook (4% annual sales growth and a 150-basis-point uptick in operating margins relative to fiscal 2020 to 24% by fiscal 2030). Shares trade at a mid-teens premium to our intrinsic valuation, and we’d suggest investors refrain from stocking up at current levels.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.