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Nathan Parsh
Nathan Parsh
Articles (160) 

Why I Didn't Mind Paying Up for Procter & Gamble

Procter & Gamble posted a 9% organic growth rate in the most recent quarter

October 25, 2020 | About:

Consumer staple giant Procter & Gamble Co. (NYSE:PG) recently reported earnings results that delivered an organic growth rate that was more than twice that of Wall Street's expectations.

Excellent growth combined with a long history of dividend growth is one of the reasons that Procter & Gamble is a favorite amongst dividend growth investors. I believe the most recent quarter shows the strength of Procter & Gamble's business, and that the company will continue to raise its dividend. Thus, I added to my position on Oct. 20 at a price of $142.47, even as the stock has become overvalued.

Quarterly highlights

Procter & Gamble released earnings results for its first quarter of fiscal year 2021 on Oct. 20 (the company's fiscal year ends June 30).

The company reported GAAP earnings per share of $1.63, $0.20 ahead of consensus estimates and a 19% increase from the prior year. Excluding the impact of currency translation, EPS was up 22%. Revenue surged 8.5% to $19.3 billion, $930 million higher than expected. This was the highest rate of year-over-year revenue growth since at least fiscal year 2016.

What really stood out was the company's organic growth.

Source: Procter & Gamble's First Quarter Earnings Presentation.

Organic growth of 9% was more than twice that of estimates of 4.1%. Much of this growth was driven by organic volumes, which were higher by 7%, but an increase in pricing and an improvement in product mix each contributed 1% to results.

Each product segment within Procter & Gamble showed sales and volume growth.

The Beauty segment saw an organic sales growth of 7%, mostly due to better volumes, but pricing added 1% to results. This segment has performed quite well for Procter & Gamble over the years as this quarter marked the 20th in a row of organic sales growth. Hair care had double-digit growth in North America and Greater China, led by an increase in premium product sales. Skin and personal care benefited from the launch of new hand soap and hand sanitizer products. Global cleansing sales were up 30% year-over-year, with every region posting double-digit growth. New products in Olay also performed well in North America, but weakness in the skin care product line SK-II led to a market share decline of 0.4% for this segment.

Grooming organic sales were higher by 6%, with a 5% improvement in volumes. Shave care sales were flat as weakness in male blades and razors offset high single-digit gains in female blades and razors. Higher demand for dry shaving and styling products led to a 30% gain in appliances. North America sales were slightly higher while Greater China and Latin America were up double digits due to volume gains. While the global shave market share was down 0.6%, appliance market share was higher by 1.1%. Product mix led to a 1.8% decline in market share for the Grooming segment as a whole.

Health Care organic sales were up 12% due to strong volume growth and a slight increase in pricing and mix. Oral care was a real source of strength as global sales were up a mid-teens percentage. This was due to higher demand for tooth paste and power toothbrush products, especially amongst the professional dental hygiene channel. Personal health care experienced better demand in digestive and wellness products. The businesses that Procter & Gamble acquired from its purchase of Merck & Company's (NYSE:MRK) consumer health business last year were up double-digits. Market share was up 1.4% for this segment.

Fabric & Home sales improved 14% due to 10% growth in volumes and 4% improvement in product mix. Home care sales spiked 30%, including 20% growth in every business in this category. Fabric was up high single-digits globally, but posted high teens growth in North America due to the company's premium products in laundry and fabric enhancers. Europe produced a low single-digit growth rate as pricing and mix helped to offset market contraction. This segment's market share was up 1.2%.

Organic sales for the Baby, Feminine & Family Care segment improved 4%. Baby care was down by a low single-digit rate as declines in Greater China and Europe more than offset an uptick in growth in North America. This region saw growth in premium products, pants and wipes. Feminine care benefited from higher overall sales, price increases and an improvement in mix in the Always Discreet product line. Family care was up double-digits due to demand and lower promotional spending. Market share contracted 0.4% due to results in regions outside of North America.

Due to first quarter results, Procter & Gamble raised its expectations for organic growth for the fiscal year to a range of 4% to 5%, up from 2% to 4% previously. The company expects foreign currency exchange to be a 1% headwind to results.

Excluding a $0.15 to $0.20 per share impairment charge due to early retirement of debt, Procter & Gamble expects core EPS growth of 5% to 8% for the year. Using last year's core EPS of $5.12, the company's adjusted EPS is projected to fall in a range of $5.38 to $5.53 for fiscal year 2021.

Valuation

If there is a quibble with shares of Procter & Gamble, it is the stock's valuation. Using Friday's closing price of $142.38 and the midpoint for expected EPS of $5.46, Procter & Gamble has a forward price-earnings ratio of 26.1. This is above the five and 10-year average price-earnings ratios of 21.6 and 19.8, respectively.

Applying the midpoint for EPS by the five-year average price-earnings ratio results in a price of ~$118, which is 17% lower than the most recent closing price. Procter & Gamble's stock is also trading above its intrinsic value according to the GF Value.

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Procter & Gamble's GF Value is $114.60, which means that the stock has a current price-to-GF Value ratio of 1.24. This earns the stock a ranking of modestly overvalued.

My thoughts

Procter & Gamble had an excellent first quarter, easily topping revenue and EPS estimates. The company's organic growth was well above what was expected as the company has seen an increase in volumes.

The company has spent much of the past few years undergoing a transformation that has reduced the number of brands it carries from 170 to 65 today. This has enabled Procter & Gamble to focus on its core brands, something that has helped the company in recent quarters.

There's no argument that the stock is overvalued today, using either the stock's historical valuation or its intrinsic value. However, I think it is likely that Procter & Gamble will continue to see high rates of organic growth.

This combined with the company's 64 consecutive years of dividend increases should make the stock one of the more appealing names in the consumer space for dividend growth investors. This is exactly why I was comfortable purchasing more shares of Procter & Gamble even at an elevated multiple.

Author disclosure: The author has a long position in the Procter & Gamble Company.

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About the author:

Nathan Parsh
I am originally from Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

Rating: 3.0/5 (2 votes)

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