Stock of the Week - Procter & Gamble (24.04.2025)

Procter & Gamble (PG.US) shares faced pressure following its third-quarter earnings report, as the consumer goods giant lowered its full-year outlook amid growing uncertainty from U.S. tariff policies and challenging consumer demand. The maker of Tide detergent and Olay skincare products delivered mixed results that highlighted the difficulties faced by consumer staples companies in the current economic environment.

Earnings Beat, But Revenue Falls Short

P&G's Q3 performance painted a mixed picture, with core earnings per share of $1.54 slightly beating analyst expectations of $1.53. However, net sales of $19.78 billion fell 2% year-over-year and missed consensus estimates of $20.22 billion. The company's organic sales growth of just 1% fell significantly short of the expected 2.53%, driven entirely by pricing increases as organic volume remained flat overall. P&G managed to grow its profit despite the revenue shortfall, with net income rising slightly to $3.77 billion compared to $3.75 billion in the same period last year.

Earnings vs Estimates. Source: Bloomberg L.P.

Category Performance Shows Uneven Demand

P&G's performance across product segments revealed a divided consumer landscape. Beauty and grooming products showed resilience, with organic sales growth of 2% and 3% respectively, both exceeding analyst estimates. Healthcare products were the standout performer with 4% organic growth, suggesting consumers continue to prioritize health-related purchases. However, the company's largest segment, Fabric & Home Care, reported flat organic sales against expectations of 2.7% growth, while Baby, Feminine & Family Care products declined 1% despite forecasts calling for 2.82% growth. This category weakness highlights shifting consumer priorities and potential trade-down behavior in household essentials.

Tariff Uncertainty Creates Market Headwinds

CEO Jon Moeller acknowledged the challenging environment, noting that P&G "delivered modest organic sales and EPS growth this quarter in a challenging and volatile consumer and geopolitical environment." The company specifically cited tariff concerns among the factors leading to its reduced outlook. While P&G has insulated itself from some potential tariff impacts by manufacturing 90% of its U.S.-sold products domestically, the company still faces exposure for the remaining 10% of imported goods, with less than 15% of those imports sourced from China. The company continues to expect a commodity cost headwind of about $200 million after tax for fiscal 2025, though it now sees foreign exchange as a slightly smaller challenge than previously anticipated.

Revised Outlook Reflects Market Realities

In response to these challenges, P&G significantly lowered its full-year guidance. The company now expects organic sales growth of approximately 2%, down from its previous forecast of 3-5%. Core earnings per share are now projected to be in the range of $6.72 to $6.82, representing growth of 2-4%, well below the previous guidance of 5-7% growth. This adjustment reflects what CFO Andre Schulten had signaled in February when he warned of slowing shipments to retailers and noted potential risks to meeting profit guidance. The company also highlighted challenges in international markets, including slower consumption in Asia and Africa, as well as anti-Western sentiment impacting sales in the Middle East.

Consumer Behavior and Retailer Dynamics Shifting

P&G's results indicate that consumers are becoming more selective in their purchasing decisions. While the company had started the year strong with its first quarterly sales beat in more than a year driven by volume rather than price increases, the latest quarter shows a reversal of this trend. The flat organic volume suggests consumers are responding differently across categories, continuing to spend on personal care items while potentially cutting back on household essentials. Additionally, the company's adjusted free cash flow of $2.85 billion fell significantly short of the expected $3.69 billion, indicating potential pressure on working capital as retailers manage inventory more cautiously.

Valuation

Procter & Gamble currently demonstrates mixed valuation metrics compared to its consumer goods peers. Trading at a price of $163, P&G presents a somewhat balanced valuation profile with both premium and discount aspects relative to competitors Unilever and Colgate-Palmolive.

Multiple-based valuation:

• Mean-based valuations indicate a potential price of $174.11 based on P/E, but lower values of $147.93, $107.68, $112.19, and $131.31 based on forward P/E, P/S, forward P/S, and P/FCF respectively
• Cap-weighted approaches point to $173.13 for P/E, but more conservative valuations of $142.58, $101.69, $105.94, and $129.32 for other metrics

Source: Bloomberg Finance LP, XTB Research

DCF Valuation 

The DCF Valuation shows that P&G appears fairly valued under specific growth and profitability assumptions:

1. Terminal Revenue Growth Sensitivity:
   • At the current price of $163, P&G appears fairly valued with terminal revenue growth of 2.6% and a WACC of 6.4%
   • More conservative scenarios with 1.4-2.0% growth and higher WACC (7.0-7.6%) suggest downside to the $107-125 range
   • More optimistic scenarios with 2.2-2.6% growth and lower WACC (6.4-6.8%) suggest valuations of $140-165
2. Operating Margin Analysis:
   • Current price of $163 aligns with scenarios combining 26-27% operating margins with 5-6% revenue growth
   • At a base case of 25% operating margin, P&G would require approximately 4-5% revenue growth to justify current market price
   • Lower margin scenarios (22-24%) would require significantly higher revenue growth rates to support the current valuation

Given P&G's recent guidance reduction to approximately 2% organic growth for fiscal 2025 (down from 3-5%) and ongoing margin pressures from commodity costs and tariff uncertainties, the current valuation appears to price in a relatively quick recovery to more robust growth and margin expansion. This suggests potential downside risk if the challenging consumer environment and geopolitical uncertainties persist longer than the market currently expects.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Procter & Gamble (D1)

The stock is trading near a zone that served as strong support throughout last year and previously triggered reversals. Bears will aim to break below the recent lows around $156, while bulls will look to reclaim the 30-day SMA at $166.82. The RSI is in bearish divergence with lower highs, and the MACD is tightening, suggesting a potential bearish crossover.