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Why Is Procter & Gamble (PG) Down 9% Since its Last Earnings Report?

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It has been about a month since the last earnings report for The Procter & Gamble Company PG . Shares have lost about 9% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is PG due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Second-Quarter Fiscal 2018 Results

The Procter & Gamble Company, popularly known as P&G, reported second-quarter fiscal 2018 financial results, wherein both earnings and revenues surpassed expectations. The company has also lifted its core earnings per share guidance to reflect the potential benefit from the Tax Act.

P&G's fiscal second-quarter core earnings of $1.19 per share beat the Zacks Consensus Estimate of $1.15 by 3.5%. The bottom line increased 10% from the prior-year quarter. Currency-neutral core earnings per share (EPS) also improved 6%. The upside was primarily driven by increased net sales and a lower core effective tax rate.

Sales in Details

P&G's reported net sales of $17.4 billion surpassed the Zacks Consensus Estimate of $17.34 billion. The top line grew 3% from the year-ago level. Foreign exchange had a 1% positive impact on sales.

Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 2% on the back of a 2% increase in organic volumes. However, price had a 1% negative impact on sales.

Quarterly Segment Discussion

Beauty: The segment's revenues grew 10% year over year to $3.2 billion. Organic sales increased 9%. While volumes increased 2%, price remained flat and mix added 7% to sales.

Skin & Personal Care organic sales grew double digits driven by Olay brand innovation and continued strong growth of the super-premium SK-II brand. Hair Care organic sales increased low single digits driven by growth across all major brands - Pantene, Head & Shoulders, Herbal Essences and Rejoice.

Global market share of the segment decreased 0.1%. The segment's net earnings grew 21% to $655 million, attributable to lower SG&A expenses and productivity improvements.

Grooming: Sales declined 1% to $1.8 billion. Organic sales declined 3% due to lower Shave Care sales. Price had a 4% negative impact on revenues. Organic volumes declined 1%, while mix remained unchanged from the prior-year level.

Organic sales were down high single digits at Shave Care due to lower pricing in the United States and negative product mix. The segment's net earnings dipped 10% to $423 million and global market share of the segment decreased 0.7%.

Health Care: Healthcare products' sales grew 7% to $2.2 billion. Organic sales increased 4%. While organic volume grew 4%, price fell 1%. Currency had a favorable impact of 3% on sales.

Oral Care organic sales increased low single digits driven by premium Oral-B power toothbrush innovation. Personal Health Care organic sales increased high single digits with increased consumption in the United States, driven by an early and intense Cough/Cold season, and strong international shipments from the PGT joint venture

Global market share of the segment decreased 0.1%. The segment's net earnings were up 8% to $455 million.

Fabric Care and Home Care: Revenues at the segment increased 3% to $5.4 billion. Organic sales grew 3% on volume growth of 3%.

Fabric Care organic sales increased low single digits driven by unit dose detergent and scent bead innovation, as well as marketing and merchandising investments. Organic sales at Home Care also increased low single digits driven by marketing and merchandising investments.

Global market share of the segment increased 0.2%. The segment's net earnings improved 2% to $714 million.

Baby Care, Feminine and Family Care: Revenues declined 0.7% to $4.6 billion. Organic sales fell 1% as volumes and prices each dropped 1%.

Baby Care organic sales declined mid-single digits due to stiff competition and trade inventory reductions. Feminine Care organic sales grew mid-single digits driven by innovation on the Always brand and positive mix from premium tier growth. Family Care organic sales grew low single digits driven by recent Charmin innovation and strong consumption of Puffs.

Global market share of the segment decreased 0.9%. The segment's net earnings decreased 12% to $597 million.

Margins

Core gross margin decreased 80 basis points (bps) to 50.7%, as productivity savings and higher sales were more than offset by headwinds such as increased commodity costs, unfavorable geographic and product mix, unfavorable pricing impacts and product reinvestments.

Core selling, general and administrative expense (SG&A) margin decreased 80 bps (as a percentage of sales) to 27.2% driven by productivity savings from overhead, higher revenues, agency fee and ad production costs. Core operating margin decreased 10 bps year over year to 23%.

Productivity cost savings contributed 190 bps of margin benefit in the quarter. P&G has been cutting costs aggressively to reduce spending across all areas like supply chain, research & development, marketing and overheads.

Financials

As of Dec 31, 2017, the company's cash and cash equivalents were $7.4 billion, up from $5.6 billion at the end of fiscal 2017 (as of Jun 30, 2017). Long-term debt was $22.2 billion as of Dec 31, 2017, up from $18 billion at the end of fiscal 2017.

Cash flow from operating activities was $7.3 billion in the first six months of fiscal 2018, up from $6 billion a year ago.

Fiscal 2018 Guidance

The Cincinnati, OH-based company maintained its projection for the year and expects organic sales growth in the range of 2-3% for fiscal 2018. All-in sales growth is expected to about 3%.

The company has lifted its core EPS growth projection to 5-8% (versus 5-7% expected earlier) compared with fiscal 2017 core earnings of $3.92 per share. The upbeat view primarily reflects the potential benefit from the Tax Act.

On a GAAP basis, EPS is expected to decrease 30-32% (compared with 26-28% decrease expected earlier) from fiscal-2017 GAAP EPS of $5.59, which included a significant benefit from the Beauty Brands transaction that was completed in October 2016. The fiscal-2018 GAAP EPS estimate includes approximately 10 cents per share of non-core restructuring costs and 24 cents per share of non-core charges related to the Tax Act.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.

Procter & Gamble Company (The) Price and Consensus

Procter & Gamble Company (The) Price and Consensus | Procter & Gamble Company (The) Quote

VGM Scores

At this time, PG has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Interestingly, PG has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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


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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