Procter & Gamble Co.’s (PG, Financial) huge gamble to readjust its product portfolio to make it a more lean, albeit high-margin, one is on the verge of paying off for the company. During the most recent quarter, the company's net sales were flat compared to last year, despite accounting for a negative 2% impact from foreign exchange.
Organic sales increased 2% during the quarter with strong gains in the health care segment. Procter & Gamble raised its guidance after the second-quarter results, and it now expects organic sales growth for 2017 to be in the 2% to 3% range.
The company’s transformation was an extremely painful process as it had to sell off multiple brands, watch its revenue slide year after year and cut down on its dividend growth. With the portfolio readjustment process nearly over, P&G needs to start posting growth numbers. Looking at the 2017 growth trajectory of 2% to 3% however, it is clear the company expects nothing more than moderate growth worldwide in the near future.
P&G has greatly improved its margins, suggesting it made the right choices when deciding what to sell and what to keep. But that is only one part of the story. If sales cannot continue growing at a steady rate for the next few decades, the stock will occassionally come under pressure depending on which direction the sales needle moves.
The company generates a significant portion (over 50%) of its revenue outside of the United States. The strength of the dollar has been hurting the company, but considering the state of global economies, it is here to stay. There is no way multinational companies with significant global presence are going to escape the impact of foreign exchange fluctuations. This further puts a dent in growth numbers for the short term.
Procter & Gamble is a great company with some solid brands that will outlast all of us. High single-digit growth seems to be out of reach for now, yet the stock has surged to 23 times earnings and 3.6 times sales. P&G looks extremely pricey at this valuation considering the slow growth of its business.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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