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Procter & Gamble: Rising Rates Give It Upside Potential
Stock Analysis & Ideas

Procter & Gamble: Rising Rates Give It Upside Potential

Procter & Gamble’s (PG) stock has been keeping shareholders very happy lately, as the asset has returned more than 11.4% over the past three months of trading and comfortably outperformed the S&P 500 companies, which are down 1.5% on average.

Procter & Gamble and its peers may benefit from the adoption of specific policies that current macroeconomic conditions today require. As such, I am bullish on this stock as I expect Procter & Gamble’s share price to continue to outperform the benchmark index for the U.S. stock market for the foreseeable future.

Procter & Gamble today serves consumers worldwide by offering a portfolio of quality and recognized branded home and personal care products. Procter & Gamble is headquartered in Cincinnati, Ohio. It manages operations in more than 70 different countries around the world.

Q2 Fiscal Year 2022 Results

Procter & Gamble’s results for the second quarter of Fiscal 2022 look strong. The company generated nearly $21 billion in total revenue, up more than 6% year-over-year and beating the median forecast by $610 million.

The Healthcare (up 8% year-over-year) and Fabric & Home Care (up 7% year-over-year) business segments grew faster than Beauty (up 3% year-over-year) and Grooming (up 4% year-over-year). Thus, organic sales grew 6% annually.

By providing a more than solid foundation, core earnings were, therefore, able to rise 1% to $1.66 per share compared to the same quarter of fiscal 2021, surpassing the median consensus estimate by $0.01.

The gross margin was 49.11% of net sales for the second quarter of Fiscal 2022, down 403 basis points from the second quarter of Fiscal 2021. The increase in prices and sales volumes could not fully offset the headwind from a negative product mix and higher costs such as raw materials and transport.

Selling, general and administrative expenses were lower, but that didn’t contribute to a higher operating income margin, which instead fell about 250 basis points.

Looking Ahead

Looking ahead to the full Fiscal Year 2022, Procter & Gamble expects total sales to grow 3-4% and organic sales to grow 4-5% compared to full-year 2021. Earnings are expected to range between $5.83 and $6 per share, with analysts estimating an average of $5.91.

Additionally, the company expects adjusted free cash flow productivity of 95% and plans to return no less than $17 billion to shareholders through dividends and share repurchases in fiscal 2022.

Favorable Outlook

Paradoxically, the Federal Reserve’s plan to increase interest rates could provide a further strong upward catalyst for Procter & Gamble shares in the coming months.

You can never be 100% sure of the financial markets, but the end of the U.S. Federal Reserve’s accommodative monetary policy should help the stock price reach higher levels.

Slowing growth from rate hikes is likely to divert consumers away from non-essential products but not Procter & Gamble, enabling the company to raise prices and pass the higher costs on to consumers. 

While many sectors could slow down as monetary policy tightens, Procter & Gamble sales and earnings should gain momentum, potentially providing strong tailwinds for higher share prices.

Solid Balance Sheet

Procter & Gamble’s balance sheet looks solid. Despite being burdened with a total of $35.7 billion in loans, which is much more than $11.54 billion in cash, the interest coverage ratio of 40 indicates that those who have lent money to Procter & Gamble don’t spend their nights staying awake. 

However, the way the company manages working capital could be improved, as indicated by a current ratio of about 0.7. According to the investor community concept, it should be 1.5 and more.

Dividend

On February 15, the company will pay a quarterly dividend of $0.87 per common share, currently yielding 2.12%. The company has been paying dividends for 65 years.

Wall Street’s Take

In the past three months, 12 Wall Street analysts have issued a 12-month price target for PG. The company has a Moderate Buy consensus rating, based on eight Buys, four Holds, and no Sell ratings.

The average Procter & Gamble price target is $172.50, implying 6.8% upside potential.

Conclusion

Procter & Gamble is among the stocks analysts recommend buying or expect to outperform. Looking ahead to a possible business cycle, I agree. Macroeconomic conditions are trending in favor of Procter & Gamble and companies with similar characteristics more than any other company.

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