P&G's weak quarter is a clearing event that sets the stage for a better year ahead

CNBC Finance

5 min read

Procter & Gamble shares are rebounding from an early-morning decline following the company's less-than-stellar results. We're viewing the quarter as a clearing event, setting up the consumer packaged goods giant for a better year ahead. Sales in the three months ended Dec. 31 increased 1% year over year to $22.21 billion, a tad short of the $22.23 billion expected by analysts, according to data provider LSEG. Adjusted earnings per share, which exclude a 10-cent per share restructuring charge, were unchanged on a year-over-year basis at $1.88, topping analyst forecasts of $1.86 per share. Bottom line We weren't expecting a strong earnings report, given that roughly two-thirds of the quarter were impacted by the government shutdown and resulting delay in SNAP benefits. CEO Shailesh Jejurikar appears to have the situation under control, and we were pleased to see the company remains on track to hit its guidance targets for organic sales growth, core EPS growth, and adjusted free cash flow productivity. Importantly, management affirmed several times on the call that the reported quarter would be the softest of the year, with stronger growth expected in the second half. Plus, some of P & G's markets outside the United States performed well in the quarter, with organic sales in Latin America up 8% and Great China up 3%. It's not just a U.S. story. The results also demonstrate why a name like Procter & Gamble is so attractive when the operating backdrop gets difficult, as management effectively offset a 1% overall volume decline with a 1% overall price increase. PG 1Y mountain P & G 1-year return Pricing power protects earnings in a slowdown, and what better way to ensure that advantage than to sell the best versions of the hygienic products consumers rely on daily? We can also attribute the resiliency to P & G's well-diversified portfolio of offerings, as organic sales growth in Beauty and Health Care offset organic declines in Grooming and Fabric & Home Care, as well as an organic sales decline in Baby, Feminine & Family Care. We view the report as a clearing event that sets the stage for better performance in the year ahead. Often, when a new CEO comes in, it's an opportunity to also reset investor expectations by revising guidance. It's common for the new leader to underpromise and overdeliver while blaming the predecessor for overly optimistic guidance. That Jejurikar saw no need to reset the outlet suggests shares are a buy at current levels. We reiterate our 1 rating and $165 price target. Guidance Despite the difficulties faced in the quarter, management reiterated its outlook for the full year, continuing to target: Sales growth of 1% to 5% year over year. Organic sales growth is expected to be in line to up 4% year over year. 2026 core earnings are still expected to be in line to up 4% versus fiscal 2025's $6.83 per share result. That calculates to a range of $6.83 to $7.09 per share, which at the $6.96 midpoint is within the estimate range compiled by LSEG. However, management's outlook for fiscal 2026 diluted net earnings per share growth was revised down to a range of 1% to 6% (down from 3% to 9% previously), "reflecting higher non-core restructuring charges in the year." Quarterly commentary As we can see from the earnings table above, despite the difficult sales environment, strong execution and a bit of pricing power allowed the company to deliver an earnings beat with solid cash flow. In Beauty, 4% organic sales growth was driven by a 3% increase in volume, 1% tailwind from foreign exchange, 2% benefit from price, and 1% headwind from sales mix. In Grooming, flat organic sales were driven by a 2% decrease in volume, a 2% tailwind from foreign exchange, and a 2% benefit from price. In Health Care, 3% organic sales growth was driven by a 1% decrease in volume, a 2% tailwind from foreign exchange, a 1% benefit from price, a 2% tailwind from sales mix, and a 1% benefit from other. In Fabric & Home Care, flat organic sales were driven by a 1% tailwind from foreign exchange, a 1% benefit from price, and a 1% headwind from the sales mix. In Baby, Feminine & Family Care, the 4% organic sales decline was driven by a 5% decline in volume, a 1% tailwind from foreign exchange, and a 1% benefit from other. On the call, the team noted that growth in the Baby, Feminine & Family Care and Fabric & Home Care segments was heavily impacted by port strikes and pantry loading in the prior-year period, making the year-over-year comparison more difficult. Regarding cash returns, the team returned a total of $4.8 billion to shareholders during the quarter, with $2.5 billion in dividends and $2.3 billion from share repurchases. (Jim Cramer's Charitable Trust is long PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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P&G's weak quarter is a clearing event that sets the stage for a better year ahead

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