Procter & Gamble Earnings: Price, Productivity Juice Profits, but Headwinds Remain

Procter & Gamble Stock at a Glance

• Current Morningstar Fair Value Estimate: $126.00
• Stock Star Rating: 2 Stars
• Uncertainty Rating: Low
• Economic Moat Rating: Wide

Procter & Gamble Earnings Update

Up to this point, gross margin expansion has proven elusive across the consumer products arena for more than a year, but wide-moat Procter & Gamble PG bucked the trend in its fiscal third quarter with an increase of 150 basis points (to 48.2%) while also boasting 7% growth in organic sales (as a 10% price bump was partially offset by a modest 3% shortfall in volumes). Management alluded to moderating freight costs, but inflationary headwinds persist (serving as a 270-basis-point drag to the gross margin).

We attribute the gross margin gain to P&G’s initiatives to raise prices (a 470-basis-point benefit) and unearth inefficiencies (a 210-basis-point benefit). And we don’t expect the firm will back down from these efforts, as it has expressed an openness to hike prices if conditions warrant while pursuing more productivity savings (centered on reducing overhead, lowering material costs from product design and formulation efficiencies, and increasing manufacturing and marketing efficiency).

Beyond aiding its profit profile, we think these efforts should ensure the firm is able to direct sufficient resources toward its brands. We view such spending as particularly pragmatic to thwart material trade down in the categories in which it plays against a tough economic backdrop. This underpins our forecast for P&G to allocate 13% of sales to research, development, and marketing annually.

With just three months left in its fiscal year, management ticked up its fiscal 2023 sales growth guidance to around 1% (from a 1% decline to flat) but held the line on its aims for flat to 4% EPS growth. Even though we don’t anticipate materially altering our near- or long-term forecasts based on the print, our $126 fair value estimate is likely to increase by $1-$2 on account of time value. P&G stock isn’t a bargain, though, trading 25% above our intrinsic valuation. However, if the stock retreats on macro or global concerns, we’d look to buy.