Consumer staples company Procter & Gamble (PG) posted lackluster results in its fiscal first quarter of 2016 … calendar Q3 of 2015, for the rest of us.
But, despite the tepid numbers, investors saw the glass as half full rather than half empty, pushing PG stock up more than 3% on Friday.
Superficially speaking, the unlikely rally was spurred by the fact that the company still managed to top earnings estimates, even if revenue plunged. Philosophically speaking though, Procter & Gamble stock is being seen as buy-worthy because the market suspects the worst is behind the company.
Is there any chance those investors could be right?
Procter & Gamble Earnings
Last quarter, Procter & Gamble earned 98 cents per share on $16.53 billion revenue. That profit was three cents better than the 95 cents per share of PG stock analysts were expecting, while the top line fell short of the anticipated $17 billion.
Revenue also came up short of the $18.77 billion in sales the company drove in the comparable quarter from a year earlier, and income also paled a bit in comparison to fiscal Q1-2015’s operating bottom line of 99 cents per share of PG stock.
In its defense, adverse exchange rates were cited as the reason for nine of the percentage points of the 12% revenue decline, with the sale of some minor brands accounting for two more percentage points of the sales dip.
But, even without those factors, Procter & Gamble would have posted yet another (albeit small) pullback in year-over-year revenue. The wider profit margins were entirely the result of cost-cutting efforts.
The Rest of the Story
It’s no secret that Procter & Gamble is a company in transition, looking to get out of businesses it knows it can’t do well in and that are simply an expensive distraction. Case in point? The impending transfer of a huge piece of P&G’s beauty business, in exchange for a respectable $12.5 billion.
This maneuver, and others like it, will allow Procter & Gamble to focus more on the core business lines that made it great in the first place. And, there’s strong evidence this refocusing is indeed the right decision.
When just looking its “core” businesses — the ones it wants to stay in — and taking out the ill effects of an exceedingly strong U.S. dollar during calendar Q3, Procter & Gamble actually posted solid results last quarter. All told, on a constant-currency basis, core earnings grew 12% on a year-over-year basis.
There’s still plenty of work to be done, however. Regardless of prices and currency woes, the total volume of core goods sold during the fiscal first quarter was lower by 4%. The planned and yet-to-be-planned divestitures won’t happen without incurring some expenses and reconfiguring pains either. But, it’s all part of a much bigger effort that should leave Procter & Gamble a leaner, meaner stock, and in turn make PG stock a more compelling investment.
As for the time frame of the turnaround, CEO A.G. Lafley noted:
“We continue to make strong progress on productivity savings, which will fuel smart investments in top-line growth. We expect second quarter organic sales growth to be positive and to further strengthen in the back half as we invest to build awareness and trial of our consumer-preferred products and brands.”
The comment loosely implies the recently completed quarter has put the bulk of any potential disappointment in the past, and further suggests the company sees blue skies ahead. It’s this optimism that prompted today’s advance from PG.
Bottom Line for PG Stock
It has been tough to be a Procter & Gamble investor of late. Even with today’s gains, PG stock is still down 15% year-to-date, and it was down as much as 26% just a month ago, mostly on concerns that it wouldn’t (or wouldn’t be able to) make the tough decisions it needed to help it thrive again.
Now, however, the market is starting to believe, and for understandable reasons.
While it’s likely more stumbles are in the cards in the near future — as they would be with any turnaround story — at least we’re more than halfway through the turnaround effort from P&G, and we can see that the light at the end of the tunnel is an opening rather than an oncoming train.
The forward-looking P/E of 18.1 is still frothy, however, for only a partially confirmed turnaround effort, so the potential of the remaining turnaround story may not have much more room to drive the stock a great deal higher … unless we start seeing some serious earnings beats.
That depends on sales growth sooner or later, though, as there’s only so much cost-cutting that can be done.
In other words, tread lightly despite today’s encouraging move.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
