Consumer products behemoth Proctor & Gamble (NYSE:PG) reported Q1 FY2024 results beating Wall Street analysts' expectations, with revenue up 6.1% year on year to $21.9 billion. Turning to EPS, Procter & Gamble made a GAAP profit of $1.83 per share, improving from its profit of $1.57 per share in the same quarter last year.
Procter & Gamble (PG) Q1 FY2024 Highlights:
- Revenue: $21.9 billion vs analyst estimates of $21.6 billion (1.4% beat)
- EPS: $1.83 vs analyst estimates of $1.73 (5.8% beat)
- Free Cash Flow of $4 billion, down 13.6% from the previous quarter
- Gross Margin (GAAP): 52%, up from 47.4% in the same quarter last year
- Organic Revenue was up 7% year on year
- Sales Volumes were down 1% year on year
Founded by candle maker William Procter and soap maker James Gamble, Proctor & Gamble (NYSE:PG) is a consumer products behemoth whose product portfolio spans everything from facial tissues to laundry detergent to feminine care to men’s grooming.
You’ve probably heard of Bounty paper towels, Pampers diapers, Tide laundry detergent, Gillette razors, and Crest toothpaste–these are some of the company’s powerhouse brands. These brands are both household mainstays as well as innovators that help steer the direction of these categories. For example, Tide introduced the first synthetic laundry detergent (made from petrochemicals) in the 1940s, moving the industry away from traditional soaps (lye and fats). Additionally, Gillette was a pioneer in multi-blade technology that resulted in a closer shave with less irritation.
Given its vast portfolio, Gillette’s core customer is nearly everyone who shops for the personal care or hygiene needs of themselves or their family members. These customers seek a brand that’s familiar and trusted, first and foremost. Additionally, these customers want cost-effective products, although many are willing to pay a reasonable premium to buy established brands rather than lesser-known or private-label brands.
It’s probably harder to avoid Gillette products rather than to find them. They drive traffic and are prominently featured on the shelves of grocery stores, mass merchandise retailers, drug stores, and specialty retailers.
Household products companies engage in the manufacturing, distribution, and sale of goods that maintain and enhance the home environment. This includes cleaning supplies, home improvement tools, kitchenware, small appliances, and home decor items. Companies within this sector must focus on product quality, innovation, and cost efficiency to remain competitive. Household products stocks are generally stable investments, as many of the industry's products are essential for a comfortable and functional living space. Recently, there's been a growing emphasis on eco-friendly and sustainable offerings, reflecting the evolving consumer preferences for environmentally conscious options.Competitors that offer a wide range of household and personal care products include Kimberly-Clark (NYSE:KMB), Unilever (LSE:ULVR), Colgate-Palmolive (NYSE:CL), and Church & Dwight (NYSE:CHD).
Procter & Gamble is one of the most widely recognized consumer staples companies in the world. Its influence over consumers gives it extremely high negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don't have).
As you can see below, the company's annualized revenue growth rate of 4.7% over the last three years was mediocre as consumers bought less of its products. We'll explore what this means in the "Volume Growth" section.
This quarter, Procter & Gamble reported solid year-on-year revenue growth of 6.1%, and its $21.9 billion in revenue outperformed Wall Street's estimates by 1.4%. Looking ahead, analysts expect sales to grow 2.6% over the next 12 months.
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
To analyze whether Procter & Gamble generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.
Over the last two years, Procter & Gamble's average quarterly sales volumes have shrunk by 1.1%. This decrease isn't ideal as the quantity demanded for consumer staples products is typically stable. Luckily, Procter & Gamble was able to offset fewer customers purchasing its products by charging higher prices, enabling it to generate 7.4% average organic revenue growth. We hope the company can grow its volumes soon, however, as consistent price increases (on top of inflation) aren't sustainable over the long term.
In Procter & Gamble's Q1 2024, year on year sales volumes were flat. This result was a well-appreciated turnaround from the 3% year-on-year decline it posted 12 months ago, showing the company is heading in the right direction.
Gross Margin & Pricing Power
This quarter, Procter & Gamble's gross profit margin was 52%. up 4.6 percentage points year on year. That means for every $1 in revenue, $0.48 went towards paying for raw materials, production of goods, and distribution expenses.
Procter & Gamble has great unit economics for a consumer staples company, giving it ample room to invest in areas such as marketing and talent to grow its brand. As you can see above, it's averaged an impressive 48.2% gross margin over the last eight quarters. Its margin has also been trending up over the last 12 months, averaging 4.4% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).
Operating margin is a key profitability metric for companies because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.
In Q1, Procter & Gamble generated an operating profit margin of 26.4%, up 2.4 percentage points year on year. This increase was encouraging, and we can infer Procter & Gamble had stronger pricing power and lower raw materials/transportation costs because its gross margin expanded more than its operating margin.Zooming out, Procter & Gamble has been a well-managed company over the last two years. It's demonstrated elite profitability for a consumer staples business, boasting an average operating margin of 23.4%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Procter & Gamble reported EPS at $1.83, up from $1.57 in the same quarter a year ago. This print beat Wall Street's estimates by 5.8%.
Between FY2021 and FY2024, Procter & Gamble's adjusted diluted EPS grew 16.7%, translating into a solid 5.6% average annual growth rate.
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 6.4% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Procter & Gamble's free cash flow came in at $4 billion in Q1, up 25.1% year on year. This result represents a 18.2% margin.
Over the last eight quarters, Procter & Gamble has shown terrific cash profitability, enabling it to reinvest, return capital to investors, and stay ahead of the competition while maintaining a robust cash balance. The company's free cash flow margin has been among the best in the consumer staples sector, averaging 16.9%. Furthermore, its margin has averaged year-on-year increases of 1.2 percentage points. This likely pleases the company's investors.
Return on Invested Capital (ROIC)
We like to track a company's return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Over the last five years, Procter & Gamble had an excellent track record of making successful investments, showing it's led by a competent management team. Its five-year average ROIC was 21.8%, beating other consumer staples companies by a wide margin.
Key Takeaways from Procter & Gamble's Q1 Results
With a market capitalization of $356.9 billion, a $9.7 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Procter & Gamble has the resources needed to pursue a high-growth business strategy.
We enjoyed seeing Procter & Gamble exceed analysts' gross margin expectations this quarter. We were also glad its revenue outperformed Wall Street's estimates. On the other hand, its EPS missed analysts' expectations. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $152.46 per share.
Is Now The Time?
Procter & Gamble may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We have other favorites, but we understand the arguments that Procter & Gamble isn't a bad business. Although its mediocre sales volumes have been a headwind, its impressive operating margins show it has a highly efficient business model.
Procter & Gamble's price-to-earnings ratio based on the next 12 months is 23.4x. In the end, beauty is in the eye of the beholder. While Procter & Gamble wouldn't be our first pick, if you like the business, the shares are trading at a pretty interesting price right now.
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