On July 30, 2019, Procter & Gamble reported its fiscal Q4 and fiscal full-year (FY) 2019 earnings today. The firm reported ‘core’ earnings per share of $4.52 which was about $0.05 higher than street consensus (the street estimate was $4.469). Revenue for the year was up 1% which was in-line, but on the high-end of the firms 0% to 1% forward guidance (see the official numbers and earnings release here).
The company’s GAAP earnings showed a per share loss of ($2.12) for the quarter and a FY gain of $1.43 vs. the higher ‘core’ earnings per share of $1.10 and $4.52 respectively. GAAP earnings took a hit due to an $8 billion balance sheet write-down on goodwill assets still carried from their 2005 acquisition of Gillette. The originally reported Goodwill associated with the Gillette purchase was $34.9 billion (per their 2006 annual report here).
Why is there such a difference between GAAP and reported ‘core’ earnings? GAAP stands for Generally Accepted Accounting Principles and includes everything that the company does, including non-cash balance sheet impairments and write-downs. Companies use ‘reported’ earnings to adjust for items that the firm considers to be one-off or a one-time occurrence. Both have advantages and disadvantages. Since GAAP includes everything during a reporting period, it can account for, and show, the effect of previously made decisions. A balance sheet impairment or write-down essentially means that an asset is not really worth the amount the firm originally thought it was worth. In this way then, GAAP earnings can be informative about poor investment decisions or the impact of significant market changes since the decision. Regarding the ongoing earnings power of a firm, ‘reported’ earnings may do a better job. Reported earnings eliminate the one-off’s and allow for easier comparisons across periods.
What earnings should you use to value a company, reported or GAAP? It depends. Generally speaking, analysts tend to look at ‘reported’ earnings (what PG calls ‘core’), however, investors should decide for themselves and stick with a particular method. Using FY reported earnings per share of $4.52, P&G trades at about 26.5x (at 7/30/2019 market prices) trailing twelve-month earnings (TTM). Using FY GAAP earnings of $1.43 the multiple is about 84x TTM (at 7/30/3019 market prices).
The company also announced what they call “all-in” forward sales guidance of 3% to 4% and forward ‘core’ earnings guidance of 4% to 9%. Applying their forward guidance to FY 2019 ‘core’ earnings of $4.52, the low end of the firm’s 2020 guidance is now $4.70 and the high end is $4.93. Price-to-Earnings (P/E) multiples on forward guidance are 25x the low-end and 24x the high-end (at 7/30/2019 market prices). Of course, there is always the chance that P&G surprises above the forward guidance range, and if it did, a forward multiple of 24x or even 23x may seem expensive to some investors for a company growing revenue at 3% or 4%. That said, it does appear that their turn-around efforts are starting to take hold and that in itself may add value.