Procter & Gamble Rides Supply Chain Storm As Sales Increased 6%

By ValueWalk 

Procter & Gamble Co (NYSE:PG) had a solid Q4 with sales growing by 6% year-on-year, beating estimates of 3.7%. The successful results also mean that sales have increased by 7% on average in the last two years —ever since the pandemic started— and the outlook for the fast consumer goods giant for 2022 is nothing less than bright.

According to an RBC Capital Markets analysis, not only did the company beat sales expectations last year, but it also scored its most successful two-year sales period in the last decade with nearly all segments growing at a soaring pace.

Also, P&G has been more successful in dealing with inflation and transportation costs headwinds than its competitors. In the U.S., the company has announced price increases across its product categories and is set to make them incremental in the second half of the year.

Success details

As per the RBC analysis, the positive result “was driven by better-than-expected sales across all segments except for Beauty, which missed consensus expectations” with organic

sales jumping 2%, well below the 5.2% estimate.

Strong sales results came from the rest as health care grew by 8% against a 5.7% estimate; fabric and home care also increased by 8% versus a 4.2% consensus; baby, feminine, and family care jumped 5% against a 1.1% estimate, while grooming increased by 5% against a 2.9% estimate.

Market share was another rubric where P&G shone, by gaining around 100 basis points of weighted average, the best result in the last 10 years, spearheaded by fabric and homecare, grooming, baby and family care, and health care.

Hurdles

For 2022, P&G estimates a $2.6 billion headwind consisting of $2.3 in commodity costs and $300 million in transportation costs, which is compared against the previous $2.4 billion —an update from November.

“Looking at this quarter specifically, commodity costs and transportation costs were 400 bps and 60 bps headwinds to gross margin, respectively. P&G commented that its guidance embeds a 44% year-on-year increase in its weighted commodity basket.”

The offset is anticipated to come after the second half of the year when the company is set to increase prices, looking for a gradual increase in gross margin.

China was a market where P&G did not perform as good in terms of sales —as the company was quick to shrink inventory levels to reflect short-term consumer demand softness.

“Specifically, P&G saw a slowdown in its beauty portfolio, namely SK-II due to store closures, lower traffic in department stores, and lower consumption in some key sales events in China with P&G unwilling to go into deep discount levels.”

Outlook

RBC estimates that organic sales of the consumer goods juggernaut will circle 4.9% —an improvement of the previous 4% estimate— as the company has reached momentum in terms of market share, aided by a strong business performance.

Earnings per share estimates are set to $5.94 for the end of 2022, and a price target of $160, up from $150, “with incremental cost inflation partially offsetting our higher topline estimates.”

According to the analysis, P&G is at present very well positioned to lead its competitors across most categories and ride the volatility of the markets after Covid. RBC asserts: “With that said, our modeling work, suggests P&G shares are near fair value.”

In a downside scenario, “we value P&G shares at $120. Our assumptions include a top-line CAGR of 1.7% and peak EBIT margins of 25%. In this scenario, we see P&G’s baby and grooming businesses continuing to weigh on its top-line, coupled with higher input costs limiting margin expansion, along with ongoing spend back of savings to maintain top-line momentum against a struggling macro backdrop.”

Article provided by ValueWalk