Procter & Gamble Earnings: Wisely Leaning on Brand Spending to Turn the Tide on Its Sales Trajectory

Key Morningstar Metrics for Procter & Gamble

• Fair Value Estimate
  : $155.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Low

What We Thought of Procter & Gamble’s Earnings

Organic sales were flat in Procter & Gamble’s PG fiscal fourth quarter, a marked slowdown from the 3% growth it posted in the previous quarter. Adjusted operating margins slipped 130 basis points to 19.5%, due to stepped-up brand investments.

Why it matters: To counter stagnant category growth rates amid an uncertain geopolitical landscape, we surmise P&G is astutely focused on funneling additional resources to enhance the performance and value proposition of its brand mix.

• While these efforts have yet to take hold in its largest market, North America (at around 50% of sales, down 1% in the quarter), P&G is again gaining share in China (which we estimate at a high-single-digit percentage of sales), with its 4% growth outpacing the market’s 2% decline.
• We posit P&G is committed to this course, as we forecast that it will direct about 13% of sales (about $13 billion) annually to research, development, and marketing over the next 10 years.

The bottom line: Our $155 per share fair value estimate for wide-moat Procter & Gamble remains in place. After a 3% pullback in shares on the news, we think investors should keep an eye on this competitively advantaged name.

• We don’t think the market appreciates the degree to which having product enhancements permeate throughout its price tiers stands to stifle competition, particularly from lower-priced private-label fare.
• Promotional levels throughout the industry have increased, but management’s rhetoric suggests it is surgically discounting to drive trial of new products (versus pursuing a volume over value strategy), which strikes us as prudent for profitably growing its top line and supporting its stalwart edge.

Big picture: To fund brand support, we’re encouraged that P&G is working to extract inefficiencies. As a part of this, the firm intends to rationalize its product set to remove complexity, though these moves are slated to dock sales growth by 30-50 basis points in fiscal 2027.