The strong U.S. dollar has been a boon for consumers, who are spending more since the dollar — by its increased value — can now buy more things. But it would appear U.S. consumers must double down on their purchases to help large multinational companies like Procter & Gamble Co (NYSE:PG) offset the negative impact the dollar has in overseas markets.
PG stock, which is down roughly 9% this year and lagging the broader indexes, has been one of several casualties of the strong dollar that devalues foreign sales.
And with Procter & Gamble earnings coming in lower than expected Thursday, the maker of Tide detergent and Olay skin care must figure out ways to negate the decline.
Until then, PG stock, despite its relative value and solid dividend yield of 3.2%, will remain under pressure for the foreseeable future.
PG Earnings Miss
For the quarter that ended March 31, PG delivered revenue of $18.1 billion, falling 8% year-over-year and missing analysts’ estimate of $18.5 billion, according to Thomson Reuters. If that wasn’t bad enough, PG posted declines across all of its major business segments. And the strong dollar was larger to blame.
This is because PG gets roughly two-thirds of its annual revenue in overseas markets, making PG stock a tough bet for the quarters ahead. So it’s possible PG stock may not have seen the worst. Procter & Gamble said Thursday it now expects a 5% to 6% revenue decline this fiscal year, due to the dollar.
“As we have done before, we’ll offset foreign exchange over time through a combination of pricing, mix enhancement and cost reduction,” said CEO A.G. Lafley in a statement.
Its true the company is working to slash costs. And PG has discussed raising prices to offset the dollar impact, but that’s a double-edged sword.
Raising prices, while it may stabilize gross/profit margins, may result in lower volumes for PG. Not all of its foreign markets are as established as the U.S. That is to say, price often matters above everything else.
And with an 11% year-over-year revenue decline in its beauty, hair and personal care division, PG may accelerate the volume declines it’s already suffering. That its fabric and home care division, which includes laundry detergent such as Tide and Gain, saw a 9% drop in revenue only adds to the pressure.
For the quarter, PG posted a profit of $2.1 billion, or 75 cents per share, down from last year’s mark of $2.6 billion, or 90 cents per share. On an adjusted basis, however, taking out one-time gains and costs, earnings of 92 cents per share came in line with estimates. That’s encouraging, yes. But it’s largely due to the cost-cutting measures PG has undertaken.
Looking Ahead for PG Stock
Before placing a bet on PG stock, investors must first reconcile how quickly can PG accelerate the pace of its recovery. Sales growth has been hard to come by. Sure, with its market cap of more than $220 billion, that’s not much of a surprise, especially with the negative dollar impact. In the case of PG, though, this quarter’s results suggest its struggles is beyond just an industry phenomenon.
So at around $82 per share and down almost 15% from its October high, PG stock is now in bearish territory. Sure, the dividend makes it attractive. But with full-year earnings projected to be in line to down in low single digits year over year, why not wait to buy the stock at a cheaper price?
And with PG stock — at a price-to-earnings ratio of 24 — trading at a slight premium to the S&P 500 (P/E of 21), the stock should be avoided until it reaches $78, or 5% lower.
At the time of this writing, Richard Saintvilus held no positions in any of aforementioned stocks.
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