Stocks are falling off a cliff. The S&P 500 has dropped 30% in about a month, on concerns that the rapidly spreading novel coronavirus outbreak will bring the global economy to a screeching halt for the foreseeable future.
Very few stocks have been spared. Not even traditionally safe consumer staples companies, like Procter & Gamble (NYSE:PG), have risen above the fray. As of this writing, PG stock is down 15% from its February highs.
How exactly will coronavirus impact Procter & Gamble? And does the 15% plunge of PG stock make sense given those implications?
In short, the impact of the virus on the company should be minimal and short-lived, but Procter & Gamble may not be a buy yet, given its ongoing headline and valuation risks.
Here’s a deeper look.
How Will Coronavirus Impact Proctor & Gamble?
In short, the coronavirus outbreak will have a minor positive impact and a major negative impact on Procter & Gamble over the next few weeks. Thereafter, the effect of the virus on the shares should largely fade.
On a positive note, the COVID-19 outbreak has sparked a flurry of panic buying from consumers, as they prepare to stay tucked away in their homes for an extended period of time. The stuff that Procter & Gamble sells — paper towels, toilet paper, tissues, home-cleaning products, dishwasher soap, laundry detergent, etc — is the exact type of stuff that consumers are panic buying. So, in the near-term, panic buying of household essentials will actually help Procter & Gamble.
But once the panic buying stops, that tailwind will end, and coronavirus-related negative catalysts will kick in. Namely, consumers — worried about getting sick and/or losing their jobs — won’t go out as much. When they do, they will likely adhere to a strict budget. That means fewer dollars from consumer will flow through the U.S. economy, which will translate into fewer dollars being spent on P&G’s products.
As long as the coronavirus outbreak keeps spreading, it will negatively impact Procter & Gamble through lower consumer spending.
But as long as Americans follow experts’ advice on social distancing and quarantining, such steps should lead to the coronavirus outbreak largely dying down in April or May. The fact that cases in China and South Korea are leveling off, while the former head of the FDA’s said that coronavirus could peak in late April make me believe that. So the most likely scenario is that coronavirus will only impact P&G’s business for one to two months.
Is PG Stock a Buy?
Assuming coronavirus-related headwinds pass by April or May, is PG stock a buy at its current levels?
Not quite. It’s true that the shares have dropped tremendously and that the stock’s dividend yield of 2.6% is more than triple the 10-Year Treasury’s yield of 0.8%.
But this stock still isn’t cheap. Trading at 23 times analysts’ average forward earnings estimate, the shares still have a premium valuation.
Further, it feels like the COVID-19 situation in America will get worse before its get better. Maybe a lot worse. The U.S. is dramatically expanding its testing capacity, and the number of confirmed cases will likely skyrocket. It’s tough to see PG stock rallying as that occurs.
So ongoing valuation and headline risks prevent PG stock from being a buy quite yet.
The Bottom Line
By reducing consumer spending, the coronavirus outbreak in the U.S. will have a negative impact on Procter & Gamble. This negative impact won’t last over the long-term. It will likely only last one to two months. Still, ongoing valuation and headline risks make PG stock too risky at its current levels.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
