As usual, Procter & Gamble Co. is expected to beat expectations when it reports second-quarter results later this week, but investors expect the stock to outperform more than in years if prices continue to rise. It can be assumed that demand will suffer.
PG, a consumer goods manufacturer,
Companies with brands such as Tide, Pampers, Crest and Head & Shoulders are expected to report quarterly results through December at the opening bell on Thursday.
Analysts surveyed by FactSet expect earnings per share (EPS) to fall to $1.59 on average, down from $1.66 a year ago. Sales are forecast to fall 1.1% to $20.73 billion, the first year-over-year decline since the quarter ended June 2017.
P&G outperformed EPS estimates by 19x over the last 20 quarters and beat revenue estimates for the last 10 quarters.
A concern among Wall Street analysts is something called price elasticity, the way economists measure the effect of price changes on demand. High elasticity means that price changes have a large impact on demand.
P&G products are considered consumer staples. That is, what consumers need, not what they want. As a result, P&G products tend to be less price elastic than consumer products.
P&G sales increased 1.3% in the first quarter. That was his 9% rise in prices offset his 3% decline in shipments, which was his first year-over-year decline in six years. But it could have been worse.
In December, Chief Financial Officer André Schulten was “positive” that demand for P&G’s products had been largely unaffected despite the company’s higher prices than its competitors, according to FactSet records. He said the resilience he sees around the world is “significantly more favorable” than expected.
But with the economy slowing and inflation remaining stubbornly high, Schulten said there is a “nervousness” that can be felt across the retail environment, even for consumer staples.
“Our category is no exception, so we are seeing a return to elasticity in line with our initial expectations,” said Schulten.
Basically, he expects P&G products to be more price elastic than they used to be, and Wall Street seems to agree.
JP Morgan analyst Andrea Teixeira expects pricing to rise 9.7% in the latest quarter, more than the 9% rise in consecutive first quarters. She also expects a larger impact on volume, which she expects her 4.2% decline, versus her 3% decline in the first quarter.
“[W]As consumers ultimately have to make tougher choices, we expect resilience to play a bigger role,” Teixeira wrote in a note to customers.
She reiterated her neutral rating on P&G stock, but raised her price target to $150 from $141.
Raymond James’ Olivia Tong also expects more resilience, with price growth flattening out at 9% but volume declines accelerating to 4%.
Still, Tong repeated his outperformance and raised his price target from $165 to $170.
Tong also raised its fiscal 2023 revenue forecast to $80.87 billion from $79.47 billion. This is his 0.8% increase from a year ago. P&G said in its October first-quarter report that 2023 sales were down 3% to 1% from 2022.
P&G shares, which fell 2.2% in Wednesday afternoon trading, are up 14.7% over the past three months. In contrast, the Consumer Staples Select Sector SPRD Exchange Traded Fund XLP
Up 5.7%, S&P 500 SPX,
It is up 6.2%.
Here’s what analysts expect revenue from each of P&G’s business segments.
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FactSet consensus for fabric and home care sales was $6.81 billion, down 2.2% from a year ago.
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Baby Care, Feminine Care and Family Care sales are expected to decline 2.5% to $4.99 billion.
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Beauty sales are expected to decline 1.8% year over year to $3.86 billion.
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Healthcare sales are expected to decline 0.1% to $2.97 billion.
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Grooming sales fell 3.4% to $1.75 billion.
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Corporate sales are expected to increase 9.0% to $165.7 million.
