Procter & Gamble: In-Line Q2 Earnings Reinforce My Bullish View (NYSE:PG)

Elevator Pitch

I leave my Buy rating for The Procter & Gamble Company’s (NYSE:PG) shares unchanged.

With my earlier write-up for PG published on October 20, 2022, I reviewed Procter & Gamble’s earnings for the first quarter of fiscal 2023 (YE June 30). In this latest update, my focus is on analyzing Procter & Gamble’s most recently announced Q2 FY 2023 financial results.

I am encouraged by the fact that PG managed to deliver in-line second quarter financial results in tough times like these, and this reinforces my positive opinion about the stock. I don’t see any reasons to change my current Buy rating for PG, taking into account Procter & Gamble’s attractive valuations and its reasonably decent 2H FY 2023 earnings outlook.

The Market’s Expectations Of Procter & Gamble’s Second Quarter Results

Prior to Procter & Gamble’s actual earnings announcement on January 19, 2023 before trading hours, the market expected PG to witness a contraction for both its top line and bottom line in Q2 FY 2023.

Specifically, the sell-side had previously forecasted that Procter & Gamble’s revenue and non-GAAP adjusted earnings per share (or EPS) would decrease by -1.0% and -4.2% to $20.75 billion and $1.59, respectively.

PG’s actual financial results for the most recent quarter didn’t disappoint the market, as I will highlight in the next section.

PG Delivered In-line Revenue And Earnings For Q2

Procter & Gamble’s Q2 FY 2023 financial performance as revealed in its results media release was reasonably good in my opinion.

Revenue for PG declined by -0.9% YoY from $20,953 million for the second quarter of fiscal 2022 to $20,773 million in Q2 FY 2023. In other words, Procter & Gamble’s most recent quarterly top line was +0.1% above the Wall Street’s consensus top line estimate. Given the marginal revenue beat, it is more appropriate to describe Procter & Gamble’s Q2 FY 2023 top line performance as in-line.

More importantly, Procter & Gamble achieved an impressive organic revenue growth rate of +5% in Q2 FY 2023, adjusted for the effects of M&A and currency fluctuations. PG’s ability to raise selling prices and pass on cost increases to consumers was evidenced by the fact that price hikes had a +1,000 basis points contribution to its organic revenue for the recent quarter which more than offset volume contraction.

PG’s non-GAAP adjusted EPS decreased by -4.2% YoY from $1.66 in Q2 FY 2022 to $1.59 in the most recent quarter, which is exactly what the sell-side analysts had projected.

Notably, Procter & Gamble’s adjusted operating profit margin (excluding the effects of currency fluctuations) narrowed by a mere -0.7 percentage points from 24.7% for Q2 FY 2022 to 24.0% in Q2 FY 2023. At its recent second quarter earnings briefing, PG highlighted that its Q2 FY 2023 operating margin saw a +1.1 percentage points benefit relating to “productivity improvements.”

Considering weak consumer demand in a tough economy and inflationary cost pressures, it was no mean feat for Procter & Gamble to register revenue and earnings that met the analysts’ expectations.

Return To Positive Earnings Growth In 2H FY 2023 Is Achievable

In tandem with its Q2 FY 2023 earnings release, Procter & Gamble revised the mid-point of its full-year fiscal 2023 top line growth guidance from 2.0% previously to -0.5% now. PG also raised the mid-point of the company’s FY 2023 revenue expansion guidance from +4.0% earlier to the current +4.5%.

Procter & Gamble also retained its +0%-4% normalized EPS guidance for full-year FY 2023. I think this set of earnings guidance for the current fiscal year is fairly conservative. At its most recent quarterly results call, PG acknowledged that “with more help (easing of commodity and currency headwinds) coming, that probably is increasing our confidence to deliver that (earnings guidance) range or hopefully slightly better.”

Procter & Gamble also stressed at the Q2 FY 2023 investor briefing that it had the intention to “preserve the flexibility to continue to invest in the priority to drive more sustainable growth” when it decided on its earnings guidance. In other words, PG’s actual investments for 2H FY 2023 might turn out to be lower than expected, which will be a boost to its earnings.

As per S&P Capital IQ’s consensus data, the sell-side analysts see Procter & Gamble recording positive normalized EPS growth of +2.2% YoY and +8.7% YoY for Q3 FY 2023 and Q4 FY 2023, respectively. This will represent a meaningful turnaround from PG’s -2.5% bottom line decline in Q1 FY 2023 and -4.2% earnings contraction for Q2 FY 2023.

In my view, it is realistic to expect Procter & Gamble to return to positive bottom line growth in the second half of fiscal 2023 considering three key drivers.

Firstly, PG is gaining market share in the US. Procter & Gamble’s US market share in terms of volume expanded by +50 basis points QoQ in Q2 FY 2023. At its Q2 FY 2023 earnings briefing, PG attributed its US share gains to the good performance of its family care and fabric care businesses, which it expects to be sustained in the quarters ahead.

Secondly, Procter & Gamble is a beneficiary of China’s move away from its COVID-zero stance. The company derives a meaningful ~10% of its revenue from the Greater China market. If China’s economy and consumer confidence recover well in line with the country’s reopening, this should be positive for the company. As a reference, PG’s Greater China market witnessed a -7% organic revenue decline for the recent Q2 FY 2023. Looking ahead, an improvement in the Greater China business’ financial performance in subsequent quarters is very likely.

Thirdly, headwinds relating to elevated commodity prices and foreign exchange are moderating. Specifically, PG lowered the estimated negative impact of commodity costs on its fiscal 2023 results from -$2.4 billion previously (when it announced Q1 FY 2023 results) to -$2.3 billion now. Similarly, Procter & Gamble’s estimate relating to the FY 2023 financial impact of foreign exchange headwinds has been cut from -$1.3 billion earlier to -$1.2 billion currently.

Procter & Gamble’s Valuations Are Attractive

PG’s current valuations are appealing based on both historical and peer comparisons.

Procter & Gamble currently trades at 23.4 times consensus forward next twelve months’ normalized P/E, which is slightly below its three-year mean forward P/E of 24.1 times as per S&P Capital IQ data.

PG is also valued by the market at a discount to its key peers. Church & Dwight Co., Inc. (CHD) and The Clorox Company (CLX) are currently trading at relatively higher consensus forward next twelve months’ normalized P/E multiples of 27.3 times and 30.7 times, respectively.

Closing Thoughts

I continue to view Procter & Gamble as a good investment candidate following its recent earnings announcement. PG’s near-term earnings outlook is favorable, and its valuations are undemanding. This is why I maintain my Buy rating for Procter & Gamble.