Consumer goods conglomerate Procter & Gamble (PG – Free P&G Stock Report) issued fiscal third-quarter (ended March 31st) results this morning. The earnings report was pretty much in line with our expectations, but investors frowned upon the news, sending PG shares modestly lower in early morning trading.
The top and bottom lines increased at a 4% year-over-year clip in the latest quarter. Core non-GAAP earnings came in at $1.00 a share, two pennies shy of our estimate, while sales came in at $16.3 billion, which was on par with our call.
The household goods maker continued to face a difficult operating environment. Higher input costs, including commodity and transportation expenses, and foreign currency impacts, challenged the company, and will probably continue to hinder margin growth in the near term. Plus, it experienced softness in its Baby, Feminine, and Family Care categories over the past few months. P&G has also been working to keep up with the changing retail environment, which has been increasingly more focused on e-commerce trends.
Organic sales only inched up about 1% over the period, while organic volume was up roughly 2%. And although improved product mix and pricing initiatives (including a focus on premium-priced goods) gave sales a boost, these results still fell somewhat short of investor expectations.
Ongoing productivity improvements and restructuring efforts should help to boost the bottom line moving forward. But the transitional impact of the U.S. Tax and Jobs Act could overshadow some of the company's near-term profit advance. In addition, the company will likely focus on its core brands, invest in product innovation, and ramp up marketing and merchandising efforts to help it gain market share. Too, it may well work on expanding its over-the-counter (OTC) personal healthcare segment.
Procter & Gamble announced an acquisition this morning. It agreed to buy the Consumer Health business of Darmstadt, Germany-based Merck KGaA, for approximately 3.4 million euro. This deal, which ought to close in fiscal 2019, should boost P&G's position in the OTC market and expand its geographic reach. Moreover, the brands, products, and capabilities should complement P&G's current roster nicely. Meanwhile, the company plans to end its OTC joint venture with Teva (TEVA) on July 1st, pending regulatory approvals. And we figure the Merck deal will replace the lost business from that partnership.
All told, we are maintaining our fiscal 2018 top- and bottom-line estimates. We expect sales to increase 3% year over year, to $67 billion, and for core earnings to climb about 8%, to $4.25 a share.
This blue-chip stock has faced a fair amount of turbulence of late. In fact, these shares have fallen about 15% in value over the past year (in comparison, the S&P 500 index is up 15% in the same period). P&G has faced difficult operating headwinds and sagging sales, which soured some investors on the equity. Nevertheless, we are optimistic that management's aforementioned strategic growth efforts will get PG back on track in the near future. Too, recent shifts in the board room may also help affect change in the coming months. As such, the equity offers worthwhile total return possibilities over the next 3 to 5 years.
About The Company:The Procter & Gamble Company makes detergents, soaps, toiletries, foods, paper, & industrial products. Brands include: Head & Shoulders, Olay, Pantene, SK-II, Wella, Fusion, Gillette, Mach 3, Presobarba, Crest, Oral-B, Vicks, Ariel, Dawn, Downy, Febreze, Gain, Tide, Always, Bounty, Charmin, and Pampers.
— Orly Seidman
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
