Profit ratio

Procter’s earnings start to show weakness in fourth quarter

Procter and Gamble (NYSE: PCG) is an American multinational consumer goods company headquartered in Cincinnati, Ohio. P&G reported earnings on the 29the July 2022, and shares were down 4% pre-market on earnings.

“Fiscal 2022 was another strong year,” said Jon Moeller, Chairman, President and Chief Executive Officer. “The P&G team’s execution of our integrated strategies has delivered strong top line growth, earnings growth and significant cash return to shareholders in the face of significant costs and operational headwinds. As we look forward to fiscal 2023, we expect another year of significant headwinds. We remain committed to our integrated strategies of superiority, productivity, constructive disruption and an agile and accountable organizational structure. They remain the right strategies to meet the short-term challenges we face and continue to deliver balanced growth and value creation.

Prudent management leads to another strong quarter

Procter posted revenue of $19.52 billion for the quarter and management was keen to point out that the company performed better than expected in revenue and earnings, despite headwinds on currencies of $3.3 billion. Fourth-quarter earnings per share rose 7% from the same quarter in 2021, but management said total earnings will slow going forward.

Home care and cleaning products were up 4% for the year, while sales in the feminine and family baby care segment were up just 2%. Sales of beauty products remained stable and skin care products increased by 1%.

Net sales for the year were $80 billion, up 5% from the prior year. Meanwhile, diluted earnings per share (EPS) came in at $5.81. Operating cash flow was $16.7 billion and adjusted free cash flow productivity was 93%. The company returned $19 billion to investors in redemptions and dividends for the year.

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The company faced many headwinds in the quarter, with sales from China and Russia continuing to weigh on segments such as beauty products. The decline in volumes in all segments was mainly due to issues related to China and Russia.

Management continues to be cautious with its outlook and understands that it faces many challenges globally as central banks continue to simultaneously raise interest rates to counter inflation, which to its turn affects purchasing power. EPS for fiscal 2023 is expected to increase 2% and revenue is expected to increase approximately 3-5% with similar organic sales levels.

P&G continues to be a well-known global brand selling everyday household essentials. The company expected higher single-digit revenue for the year and could hit those targets next year as expansion into emerging markets begins to bear fruit.

Evaluation

Procter and Gamble faces cyclical issues and the valuation remains slightly above what investors might accept. The stock currently trades at a 24x price-earnings ratio and has a dividend yield of 2.5%. Given that 10-year US Treasuries are now trading around 3%, it is possible that the stock could see a slight decline, especially if growth continues to be weaker than expected. Additionally, the company’s net profit margins have been higher than expected for the past year or so, and that may begin to change, especially if inflationary pressures continue. So far, P&G has been able to maintain a 17-18% net profit margin by passing the costs on to consumers. But the strategy has limitations despite the fact that the company falls under the category of consumer durables.

The debt ratio remains low and management has indicated that it will continue to reduce debt, with long-term debt currently standing at $22 billion, but the balance sheet remains relatively safe for now. Cash declined to $10 billion for the year, largely due to redemptions and dividends. The company’s current ratio also remains healthy at 4:1 and there is very little chance that major debt-related issues will arise.

P&G has strong institutional ownership, but insiders keep selling

P&G continues to be a top-notch stock and has a five-year beta of 0.39, making it a low-volatility stock. The company’s largest institutional investors include Vanguard, State Street Advisors and T. Rowe Price, all well-known names in the industry. But over the past two quarters, company executives and insiders have been selling shares, as many likely believe the stock has peaked for now.

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