Despite the recession fears, Procter & Gamble (NYSE:PG) stock has not done much in the past two to three years, now hovering around the levels seen in the last quarter of 2020. Indeed, Procter & Gamble stock hasn’t really delivered for investors of late, but it remains a wonderful recession-prep play for investors who didn’t get the memo that 2023 could be a recession year.
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Last year’s more than 24% drop from peak to trough was quite uncharacteristic for the blue-chip consumer staple. The supposed safety stock has been as choppy as the broader S&P 500 (SPX) last year despite the low beta of 0.43.
In any case, I view PG stock as more of a deal than a name to be concerned about as we approach yet another economic downturn. Therefore, I am bullish on PG stock.
Consumer Staples Skid Ahead of Recession Year
Consumer staple stocks haven’t performed in a way you’d expect ahead of a rush to safety. Though Procter & Gamble is still one of the gold standards in the consumer-staple space, the firm has not been immune to the headwinds and inflation that have hit most other firms.
Procter’s latest quarter induced a quick 3% plunge, as revenues barely beat ($20.77 billion vs. the $20.75 billion consensus). Per-share earnings were also precisely in line at $1.59. For a defensive firm with a history of beating modestly on estimates, the in-line results were met with distaste, likely due to the stock’s premium price tag going into the number.
Gross margins for the quarter did slip slightly to 47.5% (down 160 bps). However, I don’t view the decline as a cause for concern. Apart from forex and inflation headwinds (both transitory in nature), Procter did invest quite a bit in expanding capacity.
Undoubtedly, Amazon (NASDAQ:AMZN) is one firm that was met with punishment of late for spending too much on capacity. Compared to the e-commerce behemoth, Procter’s investments are incredibly mild and shouldn’t raise too much concern as we head into a mild recession.
Looking to future quarters, I think Procter can be a steady rock for investors seeking defensive exposure at a reasonable multiple. With impressive brands in the necessities aisle, the company has quite a bit of pricing power on its hands. The firm has some price hikes planned for its first quarter (expected to kick in this month).
Such price hikes should help the firm overcome its recent margin slip and could warrant an even larger premium as we learn more about how severe the coming recession (if it’s still on the table) will cut corporate earnings.
PG Stock: Worth the Premium, Given the Environment
At writing, PG stock trades at 24.3 times forward earnings, which is just a tad higher than its five-year historical average forward price-to-earnings (P/E) multiple of around 23.3 times. Even after a choppy year, PG stock still seems fully valued.
That said, the stock is still trading at a discount to the personal products industry average of around 30.9 times. Further, Procter has a lot going for it as it continues to pursue efforts to enhance operational efficiencies. Therefore, I think the firm could have considerable margin expansion potential for the year.
Management made good on its past five-year $10-billion cost reduction plan, which wrapped up just over a year ago. Also, though most of the juice may have mostly been squeezed, I still think there’s room for further improvement as the firm navigates into a post-recession (and post-inflation) environment.
Undoubtedly, supply-side challenges in the aftermath of the COVID-19 pandemic have allowed many firms to improve operational shortcomings. With some of the best managers in the business, I consider PG stock a defensive holding that’s not nearly as expensive as I’d expect, given the market-wide turbulence that could lie ahead.
Is PG Stock a Buy, According to Analysts?
Turning to Wall Street, PG stock comes in as a Moderate Buy. Out of 16 analyst ratings, there are nine Buys and seven Hold recommendations. The average Procter & Gamble price target is $155.92, implying an upside of 8.9%. Analyst price targets range from a low of $130.00 per share to a high of $170.00 per share.
The Takeaway: PG Stock’s a Value-Conscious Way to Play Defense
Procter & Gamble stock’s relative bout of underperformance may have more to do with unrealistic expectations tied to the historically-elevated multiple. Undoubtedly, the so-called safe stocks aren’t all that safe if you overpay. Fortunately, Procter remains on the right track despite its recent in-line results and expenditure-hit margins.
After fluctuating wildly in 2022, I think PG stock has settled in a range that’d make for a fine addition to any investor looking to play defense later in the game. The generous 2.56% dividend yield and 0.43 beta may help your portfolio as recession headwinds intensify.
