Analyst Flags Concerns About P&G Growth Despite Earnings Beat

Key Points

• P&G consistently beats revenue and earnings expectations but has seen declining product sales volumes.
• In the most recent quarter, organic sales increased by 7% driven by higher pricing but were offset by a 3% decrease in shipment volumes.
• P&G shares have performed well, returning 10.07% in the past month and 10.69% in the past year.
• Shares found support at the 50-day moving average on May 19, and are still in buy range after clearing a buy point at $154.90. 
• The company has a 68-year track record of increasing its dividend. 

If you look around your house you’re almost certain to find Procter & Gamble Co. NYSE: PG brands somewhere in the kitchen or bathroom.

While the company’s products are well-known and ubiquitous, is the company able to continue growing its sales volumes, without taking price increases into account? One analyst believes there are some red flags investors should watch for, despite the company’s history of growth. 

P&G’s top-selling brands are all highly recognizable and include Head & Shoulders, Pantene, Old Spice, Gillette, Crest, Oral-B, Pepto-Bismol, Gain, Tide, Dawn, Pampers, Bounty and Charmin, among many others. 

Procter & Gamble analyst ratings show that Truist Securities downgraded the stock on May 18 to hold from buy, saying, “We believe PG as a company is operating at the highest level in the 20 years that we have covered the stock. We simply do not see the catalysts on the horizon to recommend new money to the name at current levels.”

Will Customers Accept Price Increases?

As many companies from all industries have done in the past 18 months or so, P&G raised prices. Most analysts believe P&G maintains such a degree of brand loyalty that core consumers won’t seek cheaper alternatives, but Truist wasn’t so sure.

“We believe investors may be overreading the company’s strong F3Q23 results, believing that PG’s core consumer is largely unaffected by price increases taken over the past 18 months,” wrote Truist analyst Bill Chappell. 

In an interview with CNBC following the release of his note, Chappell pointed out that P&G has consistently beaten revenue views, as you can see using MarketBeat’s Procter & Gamble earnings data. The company also tends to beat views on the bottom line, as it did in the most recent quarter. 

However, Chappell pointed out something that eagle-eyed investors can spot on the P&G fiscal third-quarter earnings report: Volumes of product sales have been declining. Revenue grew by 4% in the quarter, but price increases can mask a decline in product shipments. 

Decrease In Shipment Volumes

In the report, the company wrote, that an organic sales increase of 7% “was driven by a ten percent increase from higher pricing and a one percent increase from favorable product mix, partially offset by a three percent decrease in shipment volumes.”

The company’s grooming; fabric & home care; and baby, feminine and family care segments all saw volume declines. The beauty and healthcare segments each saw 1% volume growth.

Chappell pointed out that a decline in volume is “demand destruction” as consumers use less of P&G’s products or are trading down to a cheaper product.

Recently, companies including Target Corp. NYSE: TGT and Home Depot Inc. NYSE: HD have warned of softening consumer demand amid rising prices.

Slimmed-Down P&G

In the past decade, urged on by activist investors such as hedge fund manager Nelson Peltz, P&G has divested itself of hundreds of products in an effort to re-focus and stabilize sales growth. For example, in 2016 it sold its fine fragrance, color cosmetics, salon professional and hair color and certain styling businesses to Coty Inc. NYSE: COTY. That brand portfolio included well-known names, including Miss Clairol, Covergirl and Max Factor. 

It sold Iams premium pet foods and other brands to privately held Mars. Inc. in 2014 and battery brand Duracell was spun off in 2014 and acquired by Berkshire Hathaway Inc. NYSE: BRK.B. 

As a component of both the Dow Jones Industrial Average as well as the S&P 500, P&G is an institutional quality stock that investors can expect to find in numerous large-cap fund portfolios. In other words, it’s extremely likely that investors who don’t own P&G as a single stock own shares in a 401(k) or individual retirement account as part of a mutual fund or ETF.

Procter & Gamble shares are up 10.07% in the past month and up 10.69% in the past year.

Support At 50-Day Average 

Shares closed at $153.17 on May 19, finding support just at their 50-day moving average. On April 21, following the third-quarter earnings report, the stock cleared a flat base with a buy point of $154.90. 

Shares are still in buy range, and the moving-average support is a good sign,

Analysts have a consensus rating of “moderate buy,” with a price target of $161.50, an upside of 5.44%. 

As with many large-cap stalwarts, an attractive feature is the Procter & Gamble dividend yield of 2.45%. The company has a 68-year track record of increasing its shareholder payout, earning it a spot on MarketBeat’s Dividend Kings list.