Procter & Gamble Earnings: Brand Investments Support Competitive Prowess

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate
  : $148.00
• Morningstar Rating
  : ★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Low

What We Thought of Procter & Gamble’s Earnings

Procter & Gamble PG chalked up 3% organic sales growth in its fiscal third quarter, reflecting a 2% benefit from volumes and a 1% increase in price. Its adjusted gross margin contracted 100 basis points to 50% as reinvestments, mix, and cost pressures offset productivity and pricing initiatives.

Why it matters: Predating tensions in the Middle East, much consternation circulated about the financial health of the global consumer. But based on P&G’s results, consumer-valued innovation remains a winning formula, even when it comes at a higher price.

• Despite looming cost pressure (pegged at $1 billion after tax in fiscal 2027 from heightened oil costs and efforts to maintain supply across its material needs), management reiterated its commitment to investing in new products to ensure its mix remains in favor.
• We forecast more than 13% of sales (around $13 billion) to be directed to research, development, and marketing annually, and 4.3% (about $4 billion) to capital expenditures as P&G works to scale capabilities across its network to solidify its leading edge.

The bottom line: Wide-moat P&G’s shares ticked up by a low-single-digit rate on the results and now trade near our unchanged $148 per share fair value estimate.

• If shares retreat on concerns around the geopolitical or macro landscape, we’d suggest investors stock up on this competitively advantaged operator.
• With three months left, P&G held full-year guidance of organic sales flat to up 4% and adjusted EPS of $6.83-$7.09, both of which align with our marks before the earnings call. In the long term, we think it will deliver around 4% annual sales growth and mid-20s operating margins (in line with historical).

Between the lines: We view P&G’s efforts to filter product enhancements across its price tiers as a prudent mechanism to stymie competition, particularly from private-label fare. For example, Tide Boost achieved mid-teens sales growth following its recent formula upgrade (the first in 25 years).