Earnings were fine due to reducing costs but sales growth lagged.
Price increases have been introduced on certain products on rising costs.
We still see P&G as undervalued. Remaining long. Members of my private investing community, Elevation Code, can follow this idea, as well as my other top picks with access to my model portfolio. Start your free trial today >>
Procter & Gamble (PG) did just enough in its fourth quarter to reassure investors that more meaningful growth is coming. It had to really after the firm's third-quarter numbers when management announced that it needed to deliver more stable top line and bottom line growth. It is often at points like these (like we had back in May when sentiment was depressed) when an inflection point comes in the shares. We are now more than $10 a share up since those May lows and with shares now well over $80, we see more upside ahead. Yes, sales came in below expectations but important trends seem to be moving in our favor.
Management stated on the call that it is finally seeing share growth increase in both jurisdictions and key categories. As we all know, share gains have been very difficult to achieve over the past at P&G, but now we are finally starting to see key sequential growth in important areas. Management stated on the call that the cutting of transportation & warehousing costs, for example, has taken time but is moving in the right direction. In fact, management stated that it is confident that more meaningful costs can be taken out of the equation from merely observing the trends. This goes back to the decision a few years back to remove over 100 brands from its portfolio in order to become super-focused on what is working.
The guidance number for fiscal 2019 (if met) should see a nice uptrend in the share price over the next 12 months. From an earnings standpoint, we still look a little on the cheap side with shares trading at an earnings multiple of 21.5. P&G's 5-year average is much closer to 23. Long-term investors need to remain patient. Management is trying to accelerate the transformation by aggressively cutting more costs, but we still have lots of moving parts here. We should see an increase of around $0.20 in earnings per share in 2019 and modest top-line growth. Here are other areas which look promising going forward.
Firstly, there maybe a doubt among long-term investors over whether this sustained SG&A expense reduction we continue to see will impact the business negatively going forward. One caller, for example, questioned the long-term effect of this sustained cost-cutting and how it would affect key segments going forward. However, management assured investors that support for brand creation would remain elevated and that it would not be dialed back. Media, for example, rose by mid-single-digits in the fourth quarter. So although SG&A expense has been declining at a meaningful clip, we would not be seeing the king of consumption and volumes P&G is reporting at present if brands were not being fully supported. Again, this speaks to renewed focus at the firm which is to grow both the top and bottom lines long term.
With respect to innovation and the pipeline, P&G is getting its products to market faster than before through the "lean" approach. Management pointed out that core innovation, which means revolutionized products, is very much the strategy at present and not the product (add-ons or minor extensions) which was very much the norm in past times on certain brands. True innovation is where the company feels it will be able to hike prices. The pipeline is full of products undergoing trials and this R&D spend is being financed in part by the licencing of its technologies. One would think again that this renewed focus should pay dividends eventually.
By deciding to bring in price increases in some segments, P&G is going to try to increase gross margins which should obviously filter down to the bottom line. Although gross margins grew in the fourth quarter, they were adversely affected by about 200 basis points due to lower pricing and an unfavorable mix. The firm's high margin "Blades & Razors" segment continues to struggle which is affecting the mix. This should settle down in time. There is always room at the top and dollars always follow value.
Putting everything together, we see no reason to change our bullish stance. Remaining long.
OBJ Price at posting:
2.9¢ Sentiment: Buy Disclosure: Held
Firstly, there maybe a doubt among long-term investors over whether this sustained SG&A expense reduction we continue to see will impact the business negatively going forward. One caller, for example, questioned the long-term effect of this sustained cost-cutting and how it would affect key segments going forward. However, management assured investors that support for brand creation would remain elevated and that it would not be dialed back. Media, for example, rose by mid-single-digits in the fourth quarter. So although SG&A expense has been declining at a meaningful clip, we would not be seeing the king of consumption and volumes P&G is reporting at present if brands were not being fully supported. Again, this speaks to renewed focus at the firm which is to grow both the top and bottom lines long term.
(20min delay)