Undervalued Proctor & Gamble Is On Track For Growth
Like so many other major consumer staples companies Proctor & Gamble (NYSE: PG
) is supported not only by repositioning efforts but by COVID-induced trends as well. Also like other consumer staples companies, Proctor & Gamble's 2020 gains appear to be sticky and providing a foundation for growth in 2021 as well. The FQ3 earnings are not only better than expected but the company also raised its guidance reaffirming the market's expectations for the FQ4 period. What we like about this stock is that it is 1) consumer-focused 2) a staple business 3) has earnings growth on tap 4) it offers some value and 5) it is a Dividend King
with a high probability of making a 66th consecutive increase in early 2022.
Proctor & Gamble Beats And Raises, Shares Fall
Proctor & Gamble had a decent Q3 period
with revenue up 5.2% from last year and on top of last year's roughly 5.0% advance. The $18.11 billion in net consolidated revenue beat the consensus by nearly 100 basis points and comes with improved guidance as well. At the organic level, adjusted for divestiture and acquisitions, revenue grew 4.0% versus the 3.7% expected by the analysts. The Beauty and Fabric/Home segments performed the best with 7.0% growth each. The Baby & Family segment saw its revenue fall -1.0%.
Moving down, there is evidence of mounting pressure on margins due to rising commodity costs but the company is taking measures to alleviate it. The adjusted gross margin came in at 50.7% versus the 50.9% expected by the analysts while operating margins missed as well. The good news is that margins are still in good enough shape to deliver better than expected GAAP earnings and net growth from the YOY period. Looking forward, the company announced it was planning price hikes to begin in the 3rd quarter. The hikes are targeted by brand and will run in the range of 5% to 10%. We view this as a net positive for the company although the impact of higher prices
on volume sales is yet to be seen.
Proctor & Gamble Boost Shareholder Returns
Proctor & Gamble's Q3 and YTD results have been so strong the company is accelerating its cash return to shareholders. The company raised the dividend by 10% earlier this month and announced an increase in buybacks for this year. The company says it is targeting more than $8 billion in dividends reflecting the recent increase and upped the buyback outlook by a billion dollars or 10% for the fiscal year. Based on the company's history, balance sheet, and guidance we believe this pace should continue into the fiscal 2022 period. The bottom line, any weakness in price action will likely be met by institutional buying in the form of company buybacks.
The Technical Outlook: Proctor & Gamble Pulls Back To Support
Shares of Proctor & Gamble are down about 1.0%
in early trading but we don't think they will stay down for long. There is already evidence of buying at the short-term moving average which is consistent with a previous resistance point. This resistance now supports level is also consistent with the baseline of a Head & Shoulders Reversal Pattern that should provide a launchpad for higher prices. There may be some more price weakness in the near term but we view it as a buying opportunity. Longer-term, this stock is going to move up and retest the recent highs before moving up to retest the 2020 highs
, if not higher.
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