Sales Continue to Climb for P&G

The prime question ahead of Procter & Gamble’s PG second-quarter results was whether the wide-moat household and personal care firm would be able to chalk up another quarter of top-line gains. As evidenced by the mid-single-digit climb in the share price, the market may be gaining an appreciation of the company's past strategic efforts, including shedding more than 100 brands from its mix since 2014. Organic sales ticked up 4% for the second consecutive quarter and on top of a 2% organic bump in the year-ago period. This reflected balanced improvement in volume (up 2%), price (1%), and mix (1%), which is a plus, in our view. We doubt this will entirely quell concerns surrounding the ability of leading consumer packaged goods firms to raise prices without incurring a sustained hit to volume, but we believe P&G's focus on brand spending (as it pertains to enhancing how a product performs, the packaging, its brand messaging, execution in stores and online, as well as the value a product offers for both its retail partners and end consumers) should maintain its competitive edge.

Management raised the top end of its fiscal 2019 underlying sales growth target to 2%-4% from 2%-3% based on its performance through the first half of the year, but it expressed some caution about potential competitive and macro challenges, prompting it to hold firm on the bottom end of the range. First-half results are tracking in line with our full-year forecast, and we see little to prompt a change to our $97 fair value estimate (outside of a $1-$2 increase to reflect the time value of money) or long-term outlook (based on nearly 4% annual sales growth in the longer term and 300 basis points of operating margin expansion to more than 24% by the end our 10-year forecast). With the uptick in the share price following these results, we view the stock as fairly valued and would suggest investors await a more attractive entry point.

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