Procter & Gamble reported a messy fiscal fourth quarter on Tuesday, putting shares of the maker of Tide and Pampers detergents on track for their worst day in two years. The stock is understandably down, but this isn’t a thesis-changing report. Total revenue for the three months ended June 30 came in at $20.53 billion, missing Wall Street’s forecast of $20.74 billion, according to estimates compiled by LSEG. Sales were essentially flat year over year. Adjusted earnings per share (EPS) rose 2% year over year to $1.40, beating estimates by 3 cents, LSEG data showed. Procter & Gamble Why we own it: We like P&G because demand for its home and personal care products doesn’t tend to fluctuate based on the economy. It has successfully navigated high inflation over the past two years. It’s the kind of defensive stock that’s good to own while the economy slows. Competitors: Colgate-Palmolive and Unilever Weight in club portfolio: 2.35% Last bought: April 3, 2024 Started: April 7, 2022 Bottom line It’s no surprise that Procter & Gamble shares are lower after reporting a mixed quarter with guidance for fiscal 2025 that barely met expectations — especially considering the stock closed Monday at a record high of $169.93. But the magnitude of Tuesday’s decline, about 6%, is excessive. Nothing in Tuesday’s report suggests that P&G — a well-run company with a track record of shareholder returns and earnings growth — is deviating from its long-term trajectory. Part of P&G’s slide may simply be that investors are looking for more exciting stories at this point in the economic and interest rate cycle. With the Fed widely expected to cut rates at its September meeting, the hottest story looks to be Stanley Black & Decker, which owns a stake in the club, which rose about 8% on the back of its earnings report Tuesday. “I don’t want you to get ahead of yourself: Procter is a much better company than 99% of the companies you can buy today,” Jim Cramer said at a Tuesday morning meeting. “But you’re not buying consistency at this point in the cycle. You’re buying explosive earnings potential (like) Stanley Black & Decker.” Investors may also be concerned that P&G could struggle to meet its guidance if consumer spending in the U.S. and Western Europe weakens in the coming quarters. On the call, management sounded upbeat about the current state of the consumer, saying that private-label market share in North America and Europe remains in line with pre-pandemic levels, noting that its products are everyday staples that people need regardless of economic conditions. P&G, though, had a choppy quarter, which could give fuel to investors worried that the deterioration in consumer growth will make its guidance harder to hit. Still, P&G plays an important role in a diversified portfolio, and its business is on solid footing. Consider this: The vast majority of P&G’s portfolio—85% of which executives say is—is performing in line with management’s expectations. That includes North America, where organic sales grew 4%, and Europe, where organic sales increased 2% despite a tough 12% year-over-year comparison. After relying on price increases to boost revenue, volumes are starting to grow again in the balance of its markets, “the turnaround we needed to see,” said CFO André Scholten. In fact, P&G reported a 2% increase in organic volume companywide, the first time it has reported growth for that metric since the third quarter of fiscal 2022. In addition, gross margins are at record levels, enabling the company to invest in marketing and product innovation to drive future sales. The remaining 15% of the business, including China and the Middle East, continues to face headwinds. In China, for example, its Japan-based skincare brand SK-II continues to be pressured by rising anti-Japanese sentiment that worsened last year as well as the country’s overall economic slowdown. Geopolitical tensions in the Middle East continue to weigh on Western retailers, executives said. Those dynamics have weighed on results in recent quarters and will continue to do so in the first half of P&G’s fiscal 2025, but eventually the company will reach a point where it faces easier year-over-year comparisons, leading to improved growth rates. In the case of SK-II specifically, management said absolute volumes and dollars are stable — just lower than last year. That helps explain how organic sales in China fell 9%, albeit a slight improvement on the 10% decline in the third quarter. Still, in the second half of fiscal 2025, P&G will benefit from weathering the sales decline. In the bigger picture, management said that improving fundamentals in China and the Middle East should enable P&G to deliver results above the midpoint of its 2025 guidance range. Of course, things could get worse, but the company is “focused on realistic expectations for results,” CEO John Mueller said. Given everything in Tuesday’s report, we reiterate our 2 rating and $170 price target on P&G. Jim said he would like to see P&G get closer to $156 per share before considering buying back some of the 70 shares we sold at $166.63 per share in May. P&G stock performance so far this year. Guidance P&G expects total sales to grow 2% to 4% in fiscal 2025, which is at the midpoint of the 3% forecast. Organic sales are expected to grow in the 3% to 5% range. Top-line growth will be driven by a mix of volume and price increases, executives said. Meanwhile, the company is guiding for full-year core earnings per share of $6.91 to $7.05, representing 5% to 7% year-over-year growth. The $6.98 midpoint is roughly in line with the $6.97 analysts had expected. That forecast includes about $500 million in after-tax commodity and currency headwinds, which will weigh on core earnings by 20 cents per share, according to P&G. Quarterly Results Of course, it would be nice to see less red in the earnings chart above, but none of the missing items are particularly worrisome. A few of the better-than-expected metrics — most notably earnings per share and free cash flow — are among the most important for a mature company like P&G. Free cash flow in particular is what enables P&G to pay its dividend, which it has increased for 68 straight years, and to steadily buy back shares. Beauty was the only sector that fell significantly short of Wall Street expectations, despite being home to the SK-II brand. Given the challenges mentioned above in China, combined with a generally weaker environment for beauty sales, it’s no surprise to see the miss here. The second-biggest miss was baby, women and family care, which was dragged down by weak performance in the baby care unit, specifically. It saw organic sales decline by a mid-single digit percentage due to market share losses for Luvs diapers. While its luxury Pampers brand performed well, management said the lower-cost Luvs brand was hurt by innovation delayed due to supply chain constraints. The company is working to bring that innovation to market, and executives have expressed confidence in Luvs’ recovery as a result. (Jim Cramer’s Charitable Trust is long on PG. See here for a full list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. 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Pampers, a brand owned by Procter & Gamble, is seen on display at a store in Manhattan, New York City, U.S., June 29, 2022.
Andrew Kelly | Reuters
Procter & Gamble Tide detergent and Pampers products maker reported messy fourth-quarter results on Tuesday, sending the company’s shares on track for their worst day in two years. The stock is understandably down, but the report doesn’t change the thesis.
