Tide Has Turned on P&G's Sales Course, Shares Pricey

Even in the face of more robust comparisons, wide-moat Procter & Gamble PG chalked up another quarter of strong sales and profit gains, evidencing the prudence of its current strategic course (anchored in driving productivity savings to fuel continued investments behind consumer-valued innovation after pruning its mix over the past several years). In the quarter, organic sales popped 7% on a 290-basis-point and 260-basis-point expansion in adjusted gross and operating margins, respectively, to 51.3% and 24.3%. Not only did the firm’s top-line bump come on top of a 4% uptick in the year-ago period, but growth was fairly balanced between price (up 1%), mix (a 2% benefit), and volumes (4% higher).

As a result of the solid start to the year, management raised its sales and earnings guidance modestly, which now sits at 3%-5% growth (from 3%-4%) and 5%-10% (from 4%-9%) growth, respectively. While our prior 3% and 7% marks continue to align with the revised outlook, we will likely edge up our $103 per share valuation by a low-single-digit percentage to account for the continued outsize performance and the time value of money. However, we don’t anticipate altering our longer-term forecast of 3%-4% annual sales growth and more than 24% operating margins by fiscal 2029, up from an average of 21.6% over the past three years. Shares traded up by around a 3% clip following the print, and as such, sit at a lofty 15%-20% premium to our assessment of P&G’s intrinsic value.

We’ve long been in the camp that P&G was poised to boast more robust sales performance, but we aren’t blind to the fact that it will soon lap tougher comparisons (that inflate throughout the rest of the year) and persistent competitive headwinds (which could include increased promotional activity particularly if the raw material inflation remains tempered, inciting competitors to reduce prices to eat into P&G’s market share) that could derail its trajectory.

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