Since its founding in 1837, Procter & Gamble (PG, Financial) has become one of the world's largest consumer product manufacturers, generating more than $76 billion in annual sales. It produces some of the world’s leading brands, including 21 that generate more than $1 billion each in annual global sales, such as Tide laundry detergent, Charmin toilet paper, Pantene shampoo and Pampers diapers.
P&G sold its last remaining food brand, Pringles, to Kellogg (K, Financial) in calendar 2012. International sales now represent around 55% of the firm's consolidated total, with approximately one third coming from emerging markets. The company is based in Cincinnati, Ohio and has a $357 billion market cap.
Financial results
For a mature, 150 year old consumer products company, recent revenue growth has been remarkably strong. Organic revenue growth for the past three fiscal years and the first half of fiscal 2022 ending in June has been in the 5% to 6% range.
For the company's second quarter of fiscal 2022, which ended on Dec. 31, 2021, there was particular strength in the Health Care and Home Care segments, which includes brands and products such as Crest, Oral-B, Scope and Vicks. Home Care brands include Cascade, Dawn and Microban 24. Those two segments increased organic sales 8%.
However, there were significant commodity and other input cost increases which offset these strong sales results. For example, gross margin for the quarter decreased 4% versus a year ago. Reductions in gross margin were driven by a 4% increase in commodity costs, 1.4% negative product mix, 0.60% from increased freight costs and 0.20% of product/package reinvestments. This was somewhat offset by increased prices and productivity savings.
Therefore, operating income for the quarter decreased 4% to $5.2 billion. However, through lower interest expense and a lower share count, earnings per share for the quarter increased 13%.
Proctor & Gamble generates massive amounts of free cash flow. For the past three fiscal years, cumulative operating cash flow was $51 billion, and with cumulative capital expenditures of only $9.3 billion, total free cash flow over that three year period was $41.7 billion.
Valuation
Despite persistent cost pressures and shortages across its supply chain, especially as it pertains to labor costs, P&G raised its outlook for fiscal 2022 all-in sales growth from a range of 2% to 4% to a range of 3% to 4% versus the prior fiscal year. The company also raised its guidance for organic sales growth from a range of 2% to 4% to a range of 4% to 5%.
P&G confirmed its outlook for fiscal 2022 diluted net earnings per share growth in the range of 6% to 9% versus fiscal 2021 GAAP EPS of $5.50.
Analyst EPS estimates for the fiscal year ending June 30, 2022 are $5.91, and for the next year, EPS estimates are approximately $6.41. If we assume fiscal 2023 will be a normalized year without extraordinary input costs and supply chain issues, then P&G is trading at 23 times forward earnings. Normalized price-earnings ratios for most of P&G’s history has been in the mid-teens range. Enterprise-value-to-Ebitda ratios are also above historical averages.
The company has been paying consistent dividends for 65 years, and the current annual dividend stands at $3.48. That equates to a dividend yield of 2.43%.
Guru trades
Gurus that have added to their P&G positions recently include Ken Fisher (Trades, Portfolio) and Yacktman Asset Management (Trades, Portfolio). Gurus that have reduced or sold out of their positions include Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Dodge & Cox.
Conclusion
P&G continues to be a quality leader in branded consumer products around the world and generates substantial levels of free cash flow. However, with earnings multiples well above the 20 mark, well above the company's historical averages, upside may be limited due the unlikelihood of further multiple expansion. P&G is somewhat overvalued, and a lower entry point may be warranted to create a margin of safety.
