P&G stock deserves to be down after a messy quarter — but not by this much

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Procter & Gamble on Tuesday reported a messy fiscal fourth quarter, putting shares of the Tide detergent and Pampers maker on pace for their worst day in two years. The stock is understandably down, but this is not a thesis-changing report. Revenue in three months ended June 30 totaled $20.53 billion, missing Wall Street expectations of $20.74 billion, according to estimates compiled by LSEG. Sales were essentially flat year over year. Adjusted earnings per share (EPS) rose 2% on an annual basis to $1.40, topping estimates by 3 cents, LSEG data showed. Procter & Gamble Why we own it : We like P & G because demand for its household and personal care products does not tend to fluctuate based on the economy. It has effectively navigated high inflation over the past two years. It’s the kind of defensive stock that is good to own while the economy slows. Competitors : Colgate-Palmolive and Unilever Weight in Club portfolio : 2.35% Most recent buy : April 3, 2024 Initiated : April 7, 2022 Bottom line It’s not surprising that shares of Procter & Gamble are lower after reporting a mixed quarter with guidance for its fiscal 2025 that merely met expectations — especially considering the stock closed Monday at a record high of $169.93. But the magnitude of Tuesday’s declines, down about 6%, is excessive. Nothing in Tuesday’s report suggests that P & G — a well-run company with a consistent track record of shareholder returns and earnings growth — is straying from its long-term course. Some of P & G’s slide may simply be that investors are looking for more exciting stories at this point in the economic and interest-rate cycle. With the Federal Reserve widely expected to cut rates at its September meeting, a buzzier story looks like fellow Club holding Stanley Black & Decker , up nearly 8% on the back of its earnings report Tuesday. “I don’t want you to outthink it: Procter is a much better company than 99% of the companies you could buy today,” Jim Cramer said on Tuesday’s Morning Meeting. “But you don’t buy consistency at this point in the cycle. You buy possible explosive earnings [like] Stanley Black & Decker.” Investors may also be worried that P & G could struggle to meet its guidance if consumer spending in the U.S. and Western Europe weakens in the coming quarters. On the call, management sounded upbeat on the current state of the consumer, saying that private-label market share in North America and Europe remains in line with pre-pandemic levels, and noting that its products are essential everyday items that people need no matter the economic conditions. Despite that, P & G had a spotty quarter, which could give fuel to investors worried that a deterioration in the consumer would make its guidance harder to achieve. Nevertheless, P & G still fills an important role in a diversified portfolio, and its business is on solid footing. Consider this: The vast majority of P & G’s portfolio — executives identified it as 85% — is performing in line with management’s expectations. That includes North America, where organic sales grew 4%, and Europe, where organic sales increased 2% despite a difficult 12% comparison in the year-ago period. After leaning on price hikes to boost the top line, volumes are growing again the balance of its markets, which is “the shift we needed to see,” CFO Andre Schulten said. In fact, P & G reported a companywide 2% increase in organic volume, its first time reporting growth for that metric since third quarter of fiscal year 2022. Additionally, gross margins are at record levels, which is enabling the company to invest in marketing and product innovation to drive future sales. The remaining 15% of the business, including the Chinese and Middle Eastern markets, continues to grapple with headwinds. In China, for example, its Japan-based SK-II skin-care brand remains under pressure from a rise in anti-Japanese sentiment that bubbled up last year in addition to sluggishness in the country’s economy overall. And geopolitical tensions in the Middle East are still having an impact on Western retailers, executives said. Those dynamics have weighed on results in recent quarters and will continue to do so in the first half of P & G’s fiscal 2025, but eventually the company will get to a point where it’s facing easier year-over-year comparisons, leading to improved growth rates. In the case of SK-II, specifically, management said absolute volumes and dollars are stabilizing — it’s just lower levels than a year ago. That helps explain how you get organic sales in China down 9%, albeit a slight sequential improvement from the 10% drop in the third quarter. In the second half of fiscal 2025, though, P & G will benefit from lapping the sales declines. And bigger picture, management said an improvement in the underlying situations in China and Middle East would enable P & G to deliver results above the midpoint of their 2025 guidance ranges. Of course, things could take a turn for the worse, but the company is “centered on a realistic expectation of outcomes,” CEO Jon Moeller said. Considering everything in Tuesday’s report, we’re reiterating our 2 rating and $170 price target on P & G. Jim said he would like to see P & G get closer to $156 a share before getting interested in buying back some of the 70 shares we sold at $166.63 each in May. PG YTD mountain Procter & Gamble’s year-to-date stock performance. Guidance P & G expects total sales to grow between 2% and 4% in fiscal 2025, which at the midpoint matches expectations of 3%. Organic sales are expected to grow in the range of 3% to 5%. Executives said the top line growth will be fueled by a balance mixed between volume and price increases. Meanwhile, the company is guiding for full-year core earnings per share between $6.91 and $7.05, representing 5% to 7% year-over-year growth. The midpoint of $6.98 is basically in line with the $6.97 expected by analysts. Baked into those projections are commodity and currency headwinds of roughly $500 million after taxes, which will pressure core EPS by 20 cents a share, according to P & G. Quarterly results Of course, it would be better to see less red in the earnings table above, but none of the line-item misses are truly alarming. And the few better-than-expected metrics — most notably, earnings per share and free cash flow — are among the most important ones for a mature company like P & G. Free cash flow in particular is what enables P & G to pay its dividend, which has increased for 68 straight years, and steadily repurchase shares. Beauty was the only segment to significantly fall short of Wall Street expectations, though it’s home to the SK-II brand. An given the aforementioned challenges in China, combined with a generally weaker environment for beauty sales, it’s not a shock to see the miss here. The segment with the second-biggest miss was Baby, Feminine & Family Care, which was dragged down by poor performance in the Baby Care unit, specifically. It saw a mid-single digit decrease in organic sales because of market-share losses for its Luvs diapers. While its premium Pampers brand performed well, management said the less-expensive Luvs brand was hurt by postponed innovation due to supply chain constraints. The company is getting that innovation into the marketplace, and executives expressed confidence Luvs will recover as a result. (Jim Cramer’s Charitable Trust is long PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Pampers, a brand owned by Procter & Gamble, is seen for sale in a store in Manhattan, New York City, U.S., June 29, 2022.

Andrew Kelly | Reuters

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P&G stock deserves to be down after a messy quarter — but not by this much

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