P&G Earnings Preview: Growth Uncertainty Slows Stock Gains After Strong 2020 

When consumer packaged goods provider Procter & Gamble (NYSE:PG) reports its latest quarterly earnings tomorrow, ahead of the open, investors will be focused squarely on whether the reopening of the US economy could end the current, impressive growth spell for the Cincinnati, Ohio-based company. The gains were fueled by consumers’ pantry-loading and increased focus on hygiene during the pandemic and related lockdowns.

Cleaning supplies, along with items such as loungewear and packaged food, have been hot sellers for months as the COVID-19 contagion forced people to stay at home. But as the U.S. vaccination rollouts accelerate, it’s not clear whether manufacturers can continue to benefit from the robust sales growth.

That uncertain outlook is perhaps the main reason that P&G shares haven't moved much this year, after impressive 2020 gains. The stock closed on Friday at $137.25, down about 1% for the year. During the same period, the S&P 500 has gained 11%. 

Another factor which could pose some challenges for the consumer staples company is the escalating cost of materials, such as plastics and aluminum, and how they'll absorb these inflationary pressures.

The producer price index, a measure of the prices businesses receive for their goods and services, rose 1% in March, the Labor Department said this month. Steel, iron, industrial chemicals, diesel and plastic resins were big gainers. The inflation measure ended the month of March up 4.2% from a year earlier, the biggest 12-month gain in a decade.

If history offers any clue, inflation actually boosts the profitability of blue chip companies. Rising material costs usually foreshadow fatter profit margins, according to a Wall Street Journal report, which cited Jonathan Golub, chief US equity strategist at Credit Suisse Group who said:

“Higher input costs generally accompany broad economic growth, which allows companies to pass along added expenses through higher prices of their own. Also, fixed expenses, like factory equipment, can be spread over greater sales.” 

P&G’s most recent guidance doesn’t see that trend going away too quickly. The maker of Charmin toilet paper, Tide laundry detergent and other household staples said in January it expected its organic revenue to grow as much as 6% in fiscal 2021, an increase from the previous forecast of no more than 5%. P&G also sees core earnings per share rising as much as 10%, up from a range of 5% to 8%.

P&G management believes that some of these COVID-19 era habits will stick, providing a long-term lift to the company.  “Health, hygiene and the clean-home focus of consumers has been forever altered,” Chief Financial Officer Jon Moeller told Bloomberg in January.

“The demand may not stay at the exact same level it is today, but it’s hard to imagine that, for instance, hand cleaning and hand sanitization revert to where they were previously.”

Bottom Line 

The pace of growth that P&G has been seeing isn’t sustainable for a consumer packaged goods company.  It wouldn’t be fair to expect a blow-out quarter every time from a giant like P&G. 

That said, P&G stock remains our favorite pick for long-term, income-seeking investors. It's one of the largest dividend payers in the U.S.—distributing a $0.87-per-share quarterly dividend for a yield of 2.53%. Any weakness is a buying opportunity, in our view.