The consumer is in focus heading into 2024. There is no doubt that 2023 was surprisingly strong in terms of retail sales trends. Disinflation trends and lingering excess savings from the pandemic, along with now-positive real wages, are helpful. Some pundits assert that increased dependence on credit cards and a surprising jump in holiday buy now, pay later activity are warning signs. Also, total holiday spending came in on the weak side.
I am slightly bullish on Procter & Gamble Co. (PG, Financial). I see shares trading modestly under their long-term average valuation, but the stock sports relative technical weakness this year.
Consumer holiday spending up 3.1% in 2023, on the low-end of the NRF's forecast
Source: Mastercard SpendingPulse
Company description
According to Bank of America Global Research, Procter & Gamble is among the world's largest consumer products companies. The company operates under five segments: Beauty, Grooming, Health Care, Fabric & Home Care and Baby & Family Care.
Some of its well-known brands include Tide, Bounty, Gillette, Crest, Olay, Head & Shoulders, Gain, Always, Downy and Dawn. Procter & Gamble is considered a Consumer Staples stalwart and is seen as a harbinger of consumer trends given its global and diversified portfolio.
Key data
Sporting a $344 billion market cap, the Ohio-based household products company within the consumer staples sector trades at an above-market 22.3 forward non-GAAP price-earnings multiple and it pays a high 2.6% dividend yield. With earnings due out in January, shares trade with a modest 18% implied volatility percentage while short interest on the stock is very low at just 0.6% as of Dec. 27.
Color on the quarter
Back in October, Procter & Gamble reported a solid first-quarter earnings report. Non-GAAP earnings of $1.83 per share topped the Wall Street consensus of $1.72 while $21.9 billion of quarterly revenue, up 6% from year-ago levels, also topped estimates. Organic sales growth was healthy at 7%, though currency impacts were negative due to a strong U.S. dollar. But with a weaker greenback since the middle of the year, expect comps to be positively impacted by foreign exchange. For fiscal year 2024, the management team sees some headwinds from currency impacts, but also a $400 million benefit from commodity tailwinds. The company's gross margin expanded in the quarter due to some pricing power β which is impressive given the largely disinflationary environment consumers have enjoyed throughout the year. Of course, lower commodity costs also mean a decline in costs.
The concern now shifts to how U.S. and international consumers will perform in 2024. Nielsen retail data show that the U.S. market may be slowing while ongoing weakness in China is a key concern. Of course, commodity prices have continued to retreat since the end of the third quarter, so that should help the margin story as we wrap up 2023. There are idiosyncratic risks, too β earlier this month, Procter & Gabmle said it would incur up to a $2.5 billion charge related to its 2005 acquisition of Gillette. What's more, Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) reportedly divested a small stake in the company.
Risks and competitor analysis
Key risks for a consumer giant like Procter & Gamble include slowing ticket sales due to weaker inflation trends and a consumer shift toward lower-margin private-label products. At the investor level, if aggressive flows come into stocks next year, that could leave defensive stocks lagging compared to more cyclical areas of the market. Compared to its peers, the company features among the highest valuations while its growth history and trajectory are somewhat slow. Profitability and free cash flow trends are robust, though, and earnings per share revisions have actually been generally positive in the last three months. Still, share price momentum has been lackluster throughout 2023.
Valuation
On valuation, analysts at Bank of America see earnings rising at a steady mid to high single-digit clip over the next few years. The current consensus forecast calls for operating earnings topping $7 per share by 2026 with sales growth in the 3% to 5% range. Dividends, meanwhile, are expected to increase over the coming quarters, while its free cash flow situation remains positive.
With a non-cyclical name like P&G, investors must pay up for its defensive nature β think of it like purchasing insurance during downturns. The stock has a five-year average non-GAAP earnings multiple of 24.4, and it currently trades at 22.7 times next year's earnings per share. If we assume a 24 price-earnings ratio and $6.60 of next 12-month earnings, then shares should be near $158, making it slightly undervalued today. Along the way, investors can earn a decent yield, too.
Procter & Gamble: Earnings, valuation, dividend yield and free cash flow forecasts
Source: BofA Global Research
Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed second-quarter 2024 earnings date of Tuesday, Jan. 22. An earnings conference call takes place immediately after the numbers hit the tape. You can listen live here. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The technical take
With shares modestly undervalued amid mixed macro risks and opportunities, Procter &Gamble's chart is unimpressive. Notice in the graph below the stock is within a trading range between the low $140s and high $150s. Shares are just now bouncing off that key area of support. Take a look, though, at the relative strength index momentum oscillator at the bottom of the graph β it has been printing a series of lower highs, indicating that momentum is weakening during the consolidation in price.
I think P&G can bounce toward the high end of the range, but I would really like to see a definitive breakout above $160, and even above the all-time high of $165 to establish a renewed uptrend. On the downside, should the $141 support level break, then look for a possible move toward the low $120. Shares attracted buyers there on a pair of occasions β once in early 2021 and again at the market's low in October last year. For now, with the stock under a flattening 200-day moving average, there is no clear trend. Moreover, there is a high amount of volume by price up to $160, making rally attempts tough sledding for the bulls.
Overall, the chart is neutral and Procter & Gamble has been an underperformer in 2023 with a persistent trading range.
An ongoing trading range, key support near $141
The bottom line
I am slightly bullish on Procter & Gamble. I like the valuation, its free cash flow and solid yield, but consumer question marks are apparent for 2024 while the technical situation is less than stellar.
