Procter & Gamble | Fundamental Analysis

Jan 18, 2022

Procter & Gamble's stock price gains have lagged the broader stock market for much of the pandemic. While sales and profits have skyrocketed since the beginning of 2020, the consumer sector giant has been left behind in a rally that has pushed fast-growing niches to new highs.

But that performance gap is closing as investors` interest in hot tech stocks fades. P&G has a chance to build on the positive momentum when the company announces its fiscal 2022 Q2 results tomorrow. Let's take a look at why the owner of global brands like Tide, Bounty, and Pampers might deliver good news to shareholders tomorrow.

First and foremost, we should look at sales momentum.

Wall Street expects sales for the period ending in late December to be $20.4 billion. While that figure represents only a 3% year-over-year increase, it represents significant growth for the world's leading consumer goods giant. During the same period two years ago, sales were $18.2 billion, and P&G's 3% growth would be in addition to the 8% growth of a year ago.

Few businesses can correspond to that level of absolute growth, but P&G is likely to engrave in direct comparisons with industry peers as well. On Wednesday, CEO David Taylor and his team are expected to talk about the market share gains that have made the company's revenues grow faster than rival Kimberly-Clark. P&G also has to show a better balance between price increases and increased sales, while Kimberly-Clark relies more on price increases to increase organic sales.

The next important point is price increases.

Both companies have been aggressively raising prices over the past few months to offset rising costs. For P&G, cost increases have not been insignificant either. Management expects inflation to reduce revenues by $2.1 billion this fiscal year.

We will find out this week whether that short-term earnings forecast has worsened again, as it did three months ago. It is more likely, however, that P&G has been able to weather the price increases. Its market leadership and dominance in premium categories of in-home care, baby care, and tissue have made its stock resistant to inflation for decades. Its success will be seen in P&G's gross profit margin, which is nearly 20 percentage points higher than Kimberly-Clark's.

Finally, the company's management will give analysts the basis for a new outlook.

Much has changed since management updated its fiscal year outlook in late October. Major changes include renewed pandemic threats, difficulties in the supply chain, and rising costs of inputs such as plastic, paper, and oil. The report will clarify whether these problems have knocked P&G off its broad growth ambitions, which call for a sales increase of about 3% this year, which would be only a modest slowdown from last year's 6% jump.

But even a slight decline in that forecast shouldn't worry investors, especially if P&G continues to gain market share and outperforms its competitors on metrics such as profitability. Shareholder returns will also be supported by share repurchase expenses and dividends, which are up for the 65th consecutive year. The annual payout has risen to $3.24 per share from $1.97 per share in the last decade alone.

That stability is one of the main reasons why dividend investors love P&G stock, and it's unlikely to be threatened by any operational problems the company may describe this week.