PG: Gauge Analysis (updated February 21, 2021)

I have analyzed P&G's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

P&G, which owns brands familiar to shoppers around the world, is a long-time giant of the consumer products industry. COVID-19 increased consumer and business demand for cleaning products and this has boosted P&G's sales, as did the greater amount of time people are spending at home.  Note that P&G acquired in November 2018 the over-the-counter (OTC) consumer healthcare business of Germany's Merck for $3.7 billion in cash.

P&G recorded profits of $14 billion on revenue of $74 billion during the last year. In the quarter that ended on December 31, 2020, P&G earned $1.64 per share (excluding certain items), which significantly beat the $1.42 Wall Street consensus forecast. See  P&G's most recent quarterly report.

Shares of P&G now trade for about $127 each, giving the company a market value of $330 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

P&G's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $332 billion (mega-cap)

2. The Company is Conservatively Financed: YELLOW

    Current ratio = 0.8 (>2.0 is conservative)

    Long-term debt/Equity = 46% (<100% is conservative)

3. The Company Generates Stable Earnings: YELLOW

    Nineteen positive quarterly earnings reports in last 5 years (almost perfect)

    Earnings variability = 27% (high)

4. The Company Exhibits Earnings Growth: GREEN

    Owner Earnings growth rate (trailing year) = 27% (very good)

    Owner Earnings growth rate (five-year average) = 18% (good)

    Free Cash Flow growth rate (trailing year) = 25% (very good)

    Free Cash Flow growth rate (five-year average) = 15% (good)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 25% (good)

    Operating Profit/Sales = 23.8% (excellent)

6. The Company Pays a Healthy Dividend: GREEN

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 3.9% (weak)

    Dividend = 50% of last year's FCF (sustainable)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 22.4 (moderate to pricey)

    Price/GAAP Earnings (five-year average) = 31.2 (expensive)

    Free Cash Flow/Market Value = 4.9% (modest, more than the five-year average of 4.5%)

    Acquirer's Multiple = 20.0 (expensive)

    Price/Book Value = 6.8 (more expensive than the five-year average of 5.1)

    Price/Sales = 4.5 (more expensive than the five-year average of 3.9)

In summary, the analysis assigned Procter and Gamble four GREEN, two YELLOW, and one RED grades.  The resulting Overall Score is 47 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, P&G does not satisfy the GCFR criteria for value-investment consideration at this time.

The share price would theoretically have to fall by 25%, from $127 to $95.50, all else being equal, to lift the Overall score to the 60-point threshold.  Check this blog occasionally for updates on P&G's performance and the resulting GCFR score.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #p&g    #pg    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

P&G: Earnings Report for the Quarter Ending December 31, 2020

Procter and Gamble (P&G) reported before the market opened on January 20, 2021, it earned $1.47 per diluted share in the quarter that ended on December 31, 2020, up 4 percent from earnings of $1.41 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Core earnings, a non-GAAP figure, rose 15 percent to $1.64 per share from $1.42 one year earlier, a much better change than seen in the GAAP figures. Core earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits. However, caution is warranted when analyzing these figures because management has considerable leeway in choosing which GAAP-required items to exclude.

This post compares the quarterly GAAP Income Statement published by P&G to the predictions I made in the “Look Ahead” post I shared earlier.   

First a little background about the company:  P&G, which owns brands familiar to shoppers around the world, is a long-time giant of the consumer products industry. COVID-19 increased consumer and business demand for cleaning products and this has boosted P&G's sales, as did the greater amount of time people are spending at home.  Note that P&G acquired in November 2018 the over-the-counter (OTC) consumer healthcare business of Germany's Merck for $3.7 billion in cash.

Revenue in the December 2020 quarter totaled $19.7 billion, 8 percent more than last year's $18.2 billion.   I had predicted Revenue of $18.8 billion, and the actual figure beat this by 5.1 percent.

The Fabric and Home Care business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 12.0 percent compared to the year-earlier result. The Baby, Feminine and Family Care business contributed 25 percent of revenue, and this unit's revenue increased by 6.0 percent. The Beauty unit supplied 19 percent of revenue, and this business's revenue rose by 6.0 percent.

The Gross Margin strengthened from 51.4 percent of revenue to 53.1 percent, a sign that P&G sold its output and services at more profitable prices relative to production costs.  I had assumed the Gross Margin would be 51.0 percent, and the actual margin was much more profitable.

Sales, General, and Administrative expenses rose from $4.9 billion in the year-earlier quarter to $5.1 billion, but SG&A decreased from 26.8 percent to 25.9 percent of quarterly revenue.  This shows the company spent less per dollar of sales on other operational costs, such as marketing. I had expected SG&A to be 28 percent of revenue, a higher figure than the actual percentage.

Interest and other non-operating items totaled a net expense of $500 million.  I had predicted $425 million.  The non-operating  figure was pushed up by a one-time charge for early repayment of long-term debt, which was expected.  I had predicted $425 million.  

The effective income tax rate rose by 2.9 percent to 20.3 percent, which had a negative effect on net income.  The rate was higher than the 18.5 percent I had expected.  

Net Income attributable to P&G increased 3.7 percent to $3.85 billion, and it beat my estimate by 22 percent.  EPS, as mentioned above, grew 4.3 percent to $1.47 per share, handily beating my $1.20 estimate.

In summary, P&G’s revenue and operating margins increased by healthy amounts in the latest quarter, when compared to the year-ear period.  Negative factors included the one-time debt extinguishment charge and a higher tax rate.  All in all, though, it was a good quarter for P&G, and much better than I had predicted.

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

#p&g  #pg  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

PG: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Procter & Gamble's earnings for fiscal 2021's second quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available later this month, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Procter & Gamble.

P&G, which owns brands familiar to shoppers around the world, is a long-time giant of the consumer products industry. COVID-19 increased consumer and business demand for cleaning products and this has boosted P&G's sales, as did the greater amount of time people are spending at home.  Note that P&G acquired in November 2018 the over-the-counter (OTC) consumer healthcare business of Germany's Merck for $3.7 billion in cash.

Shares of P&G now trade for about $139 each, giving the company a market value of $364 billion. These shares can be found in the Dow Jones Industrial Average, Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, New York Stock Exchange Composite, and Russell 1000 stock indices.

P&G recorded profits of $14 billion on revenue of $72 billion during the last year. In the quarter that ended on 30 September 2020, P&G earned $1.63 per share, which significantly beat the $1.42 Wall Street consensus forecast. See https://tinyurl.com/yxf89wdr for P&G's most recent quarterly report.

Revenue in the September 2020 quarter totaled $19.3 billion, 9% more than last year's $17.8 billion. The Fabric and Home Care business was responsible for 34% of overall revenue, and this unit's revenue grew by 14.0% compared to the year-earlier result. The Baby, Feminine and Family Care business contributed 24% of revenue, and this unit's revenue increased by 3.0%. The Beauty unit supplied 20% of revenue, and the value rose by 7.0%.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

P&G management updated their expectations for fiscal 2021 in October 2020 when they last reported quarterly results.

P&G raised its outlook for fiscal 2021 all-in sales growth from a range of one to three percent to a range of three to four percent versus the prior fiscal year. The revised range includes an estimated one percent negative impact from foreign exchange. The Company raised its outlook for organic sales growth from a range of two to four percent to a range of four to five percent.

The Company said it now expects fiscal 2021 GAAP diluted net earnings per share growth in a range of four to nine percent versus fiscal 2020 GAAP EPS of $4.96. GAAP EPS guidance now includes non-core charges in the range of $0.15 to $0.20 per share from the early debt retirement project that was initiated earlier this month. P&G raised guidance for core earnings per share growth from a range of three to seven percent to a range of five to eight percent versus fiscal 2020 core EPS of $5.12. The Company said its current outlook includes headwinds of approximately $325 million after-tax from foreign exchange impacts and $50 million after-tax from higher freight costs. The outlook also includes an estimated $150 million after tax headwind for the combined impacts of higher interest expense and lower interest income. These headwinds should be partially offset by approximately $175 million after-tax benefit from lower commodity costs.

P&G did not provide any specific guidance for the December 2020 quarter.  

Revenue is predicted to rise between 3 and 4 percent for the fiscal year, but this figure grew 8.5 percent in the September quarter.  This may indicate that management is somewhat concerned that the overall economic impact of COVID-19 might start to have more of a negative effect on P&G.  I'm going to assume that P&G's revenue in the December 2020 quarter will only be 3 percent more than in the December 2019 period.

GAAP EPS for the fiscal year is expected to increase between 4 and 9 percent from last year's $4.96, which sets the range as $5.16 to $5.41.  The reported EPS for the September quarter was $1.63, which leaves $3.53 to $3.78 for the final nine months of the fiscal year.  It's also worth noting that operating earnings per share will have to be $0.15 to $0.20 higher than this range to compensate for an early debt retirement charge.

For the Gross Margin and Sales, General and Administrative (SG&A) expenses, I'm assuming their values as a percent of sales will be consistent with P&G recent quarters.  I'm not sure if forecast for the early debt retirement charge will be fully recognized in the December quarter, but I reduced my estimate of non-operating gains by $400 million to account of this charge.

For the other lines of the Income Statement, I tried to choose values consistent with historical results.  I end up with an earnings estimate of $3.15 billion, or $1.20 per share.

The following Income Statement results from estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

 #p&g  #pg  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis