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Ishan Majumdar
Ishan Majumdar
Articles (115)  | Author's Website |

Procter & Gamble: Consumer Essentials Play

The consumer goods blue-chip delivered a strong third quarter

April 27, 2020 | About:

Consumer essentials is a space that has been relatively more resilient to the Covid-19 pandemic and subequent quarantine measures than many other sectors. With consumers stocking essentials all over the world amidst the lockdown, Fast-Moving Consumer Goods (FMCG) giants like The Procter & Gamble Company (NYSE:PG) are witnessing a temporary spike in revenues.

Procter & Gamble recently released strong results for its third quarter of fiscal 2020, while its stock price also showed good recovery from the market slump. The company’s range of products related to hygiene and cleanliness have got a strong boost.

Company overview

Procter & Gamble is one of the oldest and largest consumer product manufacturers in the world with a top-line of nearly $70 billion. Founded in 1837, the company operates through five main segments – Beauty, Grooming, Health Care, Fabric & Home Care and Baby, Feminine & Family Care. The company has a portfolio of some of the most consumed FMCG brands in the world, such as Head & Shoulders, Pantene, Olay, Old Spice, Oral-B, Vicks, Gillette, Mr. Clean, Tide, Pampers and Tampax Around 21 brands of the company have an individual brand turnover of over $1 billion.

Procter & Gamble is headquartered in Cincinnati, Ohio and has operations all over the world ,including North and South America, EMEA, Asia Pacific, India and China. It generates around 55% of its turnover outside the United States. As of the writing of this article, the company reports a workforce of close to 97,000 people and is one of the largest FMCG giants in the world.

Financial performance

As you can see in the above chart, Procter & Gamble’s stock price has shown a reasonably good recovery post the market crash. Some of the recovery can be attributed to a decent quarterly result.

The company reported a 5% jump in the overall top-line compared to the prior-year quarter, with revenue rising to $17.21 billion. While this was slightly below the analyst consensus estimate of $17.31 billion, the company was able to report earnings per share (EPS) of $1.17, which was above the analyst consensus estimate of $1.13. The was a 6% jump in the overall volumes sold and about 1% in pricing, implying a good quality of earnings, but the company did face some currency headwinds.

The top-performing segments in terms of volume were health care, fabric & home care and baby, feminine & family care, each of which grew between 7% and 8%. Beauty and grooming were more or less flat and barely witnessed a 1% volume growth. Overall, the company is currently running at an operating margin of 21.77%, well above its FMCG peer group, resulting in a return on equity of 9.85% and implying strong potential for value creation.

Short term boost

The spike in certain revenues will likely be short-term, with consumers all over the world hoarding essential goods, which account for a large chunk of the company’s offerings. This is largely applicable to the company's Home Care segment, Family Care segment and Healthcare business. Procter & Gamble’s hand soap brands are witnessing a sharp jump. Also, people in the U.S. are doing more laundry loads per week and washing more garments after wearing them just once owing to a heightening sense of hygiene. This is leading to a jump in the use of detergent brands like Tide, especially its antibacterial spray. The same logic applies with respect to the use of dishwasher soap at home. As consumers are forced to stay home in the lockdown, there is greater consumption of such soap. Other brands seeing sales increasing are Mr. Clean, Bounty and Swiffer.

To cash in on the situation, the company recently launched Microban 24, an antimicrobial technology that keeps surfaces sanitized for up to 24 hours when used as directed. Microban 24 works by creating a multilayer protective shield that binds the bacteria-fighting ingredient to the surface that has been cleaned, even when contacted multiple times, helping homes stay cleaner and more hygienic for longer durations. This is another big potential booster to the company’s revenue.

Key takeaways

Apart from the recently gathered price momentum, the company is also a yield play, as the management has increased dividend payouts for 63 years. The fundamental risk associated with the company in the current scenario is that the lockdown, loss of jobs and the growing economic weakness might actually prompt consumers all over the world to give up on the use of branded FMCG products like those of Procter & Gamble and start using private labels or unbranded goods. However, for now the company continues to be a solid blue-chip that has stood the test of time and has certainly shown strong resilience in the current industry-wide turbulence.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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