Sales Bloom, Profits Wither for Procter & Gamble

Third-quarter results once again reflect the prudence of wide-moat Procter & Gamble’s PG decision eight years ago to tilt its portfolio more toward daily use, essential categories. Organic sales shot up 10%, on top of a 4% gain last year. And despite a stout 5% contribution from higher prices, volumes held up quite well, benefiting sales to the tune of 3% (with favorable mix also aiding sales by 2%). Even as consumers have been digesting higher prices at the shelf seamlessly thus far, we’re cognizant the combination of skyrocketing prices throughout the grocery store, rising gas prices, and mounting interest rates (among other factors) could ultimately prompt trade down to lower-priced alternatives.

However, we’re encouraged that P&G’s strategic course has been anchored in bringing superior products to the market (in terms of how a product performs, its packaging, brand messaging, execution in stores and online, and the value offered for retail partners and end consumers) and touting that fare in front of consumers. We don’t expect the firm will deviate from this course, which should blunt any potential impact. In this context, we forecast P&G will expend around 13% of sales (about $12 billion annually) on research, development, and marketing over the course of the next 10 years to ensure its products continue to win with consumers and to support its entrenched relationships with its retail partners.

With just three months left in its fiscal year, management ticked up its fiscal 2022 sales growth guidance to 4%-5% (from 3%-4%), while holding the line on its aims for 6%-9% EPS growth, which squares with our preprint outlook (4% and 7%, respectively). Even though we don’t anticipate materially altering our near- or long-term forecast, our $123 fair value estimate is likely to increase by $1-$2 on account of time value. However, shares are far from a bargain, trading about 33% above our intrinsic valuation.

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