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Procter & Gamble Co (PG) Stock: This Quarter Is a BIG One

Think Procter & Gamble is a classic 'buy and hold' stock? Think again. PG stock has been changing while no one was paying attention.

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In a way, the second-quarter earnings report for Procter & Gamble Co (NYSE:PG), due on Friday morning, is the beginning of a new era for PG stock.

OK. That’s a bit of an exaggeration … but only just a bit. P&G has spent the last few years making major changes to its business.

A huge cost-cutting program has reduced manufacturing headcount by almost a quarter. P&G divested its Duracell brand to Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) and shipped its beauty brands to Coty Inc (NYSE:COTY) in a deal that closed in October. It has shut down underperforming brands and realigned its business into 10 key categories.

So far, it hasn’t done much for PG stock.

To be sure, Procter & Gamble stock hasn’t been a bad investment, particularly considering that PG’s dividend yield has hovered around 3% for the past decade. But it has underperformed not only the S&P 500 but peers like Unilever plc (ADR) (NYSE:UL) and Colgate-Palmolive Company (NYSE:CL). Indeed, PG stock’s current price of $84.93 is still below late 2014 levels.

Procter & Gamble (PG) stock returns

Still, Procter & Gamble is pricing in a reasonable amount of growth; PG shares trade at 22 times consensus earnings estimates. That’s a multiple similar to what P&G received a decade ago, when its organic revenue growth was in the mid-single-digits, and the company posted consistent earnings increases.

Clearly, the market is expecting the recent efforts to allow the company to get at least closer to that type of growth. That makes Q2 results rather important for Procter & Gamble and PG stock holders.

What to Watch For in P&G’s Q2 Earnings Report

Procter & Gamble posted a pretty solid Q1, beating Street estimates and reporting 3% organic sales growth — all of which came from volume, not pricing. But that quarter benefited from an easy comparison, as organic sales had declined in the year-prior quarter. P&G’s second-quarter results will be compared to more normalized results; and indeed, analysts are only expecting a 2% increase in EPS year-over-year.

There are two ways to look at the potential market reaction to the quarter.

On the one hand, expectations aren’t particularly high as far as PG earnings go — at least on Wall Street, anyway. Estimated EPS growth doesn’t imply any real improvement in the business; PG has retired a sizable number of shares over the past 12 months, both through the Duracell and Coty deals and through its own repurchase plan.

Excluding those divested businesses (and other minor changes), it appears analysts are expecting basically flat net income growth and a likely 1%-2% increase in revenue. That seems a reasonably low bar to clear.

The flip side is that it also means any type of miss relative to expectations could send PG stock tumbling. Again, this is the first “clean” quarterly report from P&G in some time. The major cost-cutting is being lapped. The Coty deal is done, and product reporting is realigned. The strength in the U.S. dollar (a major problem for P&G the last few years) should be relatively stable year-over-year.

P&G now needs to show that the efforts of the last five years — through which investors have waited patiently, in my opinion — are bearing some sort of fruit. If they don’t, I do not believe the market will react kindly.

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