Can Procter & Gamble Beat Back the Competition?

There's no denying the rising investor enthusiasm about Procter & Gamble's (NYSE: PG) business lately. The consumer staples titan has outpaced a rallying stock market so far in 2019, with its 30% increase making it one of the top five performers on the Dow.

The optimism has been supported by usually strong sales growth in recent quarters. Yet P&G's expansion pace will face a few big competitive challenges in its new fiscal year, management predicted back late July. Investors will get their first look at how well the maker of Tide detergent and Pampers diapers is faring when P&G reports fiscal first-quarter results on Tuesday, Oct. 22.

A woman uses a laundry machine.

Image source: Getty Images.

Seeking balance

The big story for P&G lately has been accelerating organic sales growth. Rather than slowing as management had forecast, that figure jumped to 7% in the most recent quarter to push growth up to 5% for the full year. The boost also marked the company's fastest expansion pace since before it embarked on its multiyear transformation project in 2013.

Investors aren't looking for similarly strong results again in fiscal 2020. P&G is facing a tougher comparison against the prior year, after all, and rivals like Kimberly-Clark will be mounting serious challenges aimed at stalling its market share growth. A solid report would include robust growth of at least 3%, though, to mark just a slight slowdown from the 5% increase P&G notched through fiscal 2019.

Looking behind that top-line figure, shareholders will want to see a balance between volume gains and higher prices. If instead volume is flat or slips into negative territory, then P&G's rivals might be succeeding at winning back share.

Efficiency gains

Faster growth might be a good reason to like P&G stock today, but its financial fortitude is even more attractive. Adjusted earnings rose 7% last year to outpace revenue gains despite rising commodity costs and increasing tariff expenses that cleaved over $1.4 billion from net earnings.

The growth picture is always cloudy, but P&G's finances are relatively easy to project in this environment. Management is aiming to continue slashing costs on everything from the supply chain to marketing to manufacturing in 2020. That success, combined with the company's market-leading cash flow, should deliver both increasing earnings and higher direct cash returns from dividends and stock repurchase spending. To judge whether trends are still improving here, keep an eye on metrics like operating margin, cash flow productivity, and core EPS growth.

Looking out to 2020

P&G entered the fiscal year projecting organic sales gains of between 3% and 4% compared to last year's 5% boost. This prediction assumes modest market share growth, and its conservative approach reflects the potential for economic disruption in key markets in Europe and Latin America, as well as more aggressive competition from the likes of Kimberly-Clark.

With just one quarter behind it, CEO David Taylor and his management team might not shift the fiscal 2020 growth outlook on Tuesday. Thus, investors ought to follow P&G's conference call for clues to the wider industry trends. Back in July, CFO Jon Moeller said the midpoint of guidance reflects market share growth, while the low end opens the door for a quick return to slight declines. Tuesday's report might help clarify which of those scenarios is looking likely in 2020.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool is short shares of Kimberly-Clark and Procter & Gamble. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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