Procter & Gamble Commentary on Q2 2020 Earnings

On January 23, 2020, Procter & Gamble reported fiscal 2020 2nd quarter earnings. The firm reported ‘core’ earnings of $1.42 per share, $0.05 better than consensus expectations of $1.37. Also, GAAP diluted net earnings was $1.41 per share.

Aside: Why is there a difference between GAAP and ‘core’ earnings? GAAP, Generally Accepted Accounting Principles, includes everything that a company does in a reporting period. The itemized impact of large restructurings, asset sales, spin-offs, and non-cash balance sheet impairments and write-downs are all included in GAAP earnings. Companies use ‘core’, or, ‘reported’ earnings to adjust for items that the firm considers to be a one-off or sporadic occurrence. Both have advantages and disadvantages. Since GAAP includes all items, it can account for and show the effect of previously made decisions. For example, a balance sheet impairment or write-down essentially means that an asset is deemed not really worth the value the firm originally thought it was worth. In this way then, GAAP earnings can be informative about a poor investment decision or the impact of significant market or regulatory changes since the decision. Regarding the ongoing earnings power of a firm, non-GAAP ‘reported’ earnings may do a better job. Reported earnings adjust for one-off items and allow for easier comparisons across periods.

Net Sales

Net sales for the quarter was $18.20 billion, up 5% vs. the previous year, and slightly below the $18.37 billion consensus estimate. Major brand restructurings and renewed focus on key brands over the past few years appears to be bearing fruit as all five P&G business segments reported positive net sales growth and organic sales growth.

The company announced “all-in” forward sales guidance of 3% to 5% for full fiscal year 2020 and tightened their organic sales growth to 4%-5% vs. the previous 3%-5% estimate.  P&G and others uses ‘organic sales growth’ as a non-GAAP measure to exclude the impact on sales due to foreign exchange translations and acquisitions/divestitures. For comparison, consumer goods competitors Colgate Palmolive and Kimberly Clark set 2020 organic sales growth expectations at 3%-5% and 2% respectively.

Procter & Gamble’s gross profits increased to 51.4% from 48.9% the previous year demonstrating their cost reduction discipline. P&G’s increasing gross margins put them just ahead of the mid-point between consumer goods competitors Colgate Palmolive and Kimberly Clark where Q4 2019 gross margins were 60.1% and 34.0% respectively.

Overall, P&G reported a solid second quarter and expectations for the remainder of fiscal 2020 tightened to the upside.  

Common Stock Valuations

For a quick look at common stock valuations, P&G’s January 31, 2020 opening stock price was $125.99.  Applying Procter’s trailing four quarter core earnings of $4.95 puts their price-to-earnings (P/E) valuation at 25.4x. That puts P&G in the upper end between Colgate Palmolive’s 26.8x and Kimberly Clark’s 23.3x valuations. For a broader comparison, the P/E valuation for the Consumer Staples sector is currently 20.4x (based on the Consumer Staples Select Sector SPDR fund XLP).  Historically, Consumer Staples firms command higher stock valuations. This is partly due to investor appetite for the relatively predictability earnings that staples firms have delivered over time compared to other more cyclical companies. That said, as valuations rise, the expectation for more earnings growth rises as well. 

 

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Disclosure: This material is provided by Schmitt Wealth Advisers for informational purposes only.  It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product.  Opinions expressed by Schmitt Wealth Advisers are based on economic or market conditions at the time this material was written.  Economies and markets fluctuate.  Actual economic or market events may turn out differently than anticipated.  Facts presented have been obtained from sources believed to be reliable.  Schmitt Wealth Advisers, however, cannot guarantee the accuracy or completeness of such information.  Past performance may not be indicative of future results.

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