Procter & Gamble
Moat: 3/5
Understandability: 2/5
Balance Sheet Health: 4/5
Procter & Gamble is a multinational consumer goods corporation with a diverse portfolio of brands across various sectors like beauty, grooming, health care, and family care.
Investor Relations Previous Earnings Calls
The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.
P&G operates through a multi-channel strategy including wholesalers, distributors, retailers, and online selling.
Business Overview
Procter & Gamble (P&G) operates in the consumer goods sector with a wide array of products across various categories. The company segments its business into the following:
- Beauty: This segment includes products like skin and personal care, hair care, and cosmetics. Key brands include Olay, Pantene, and Head & Shoulders.
- Grooming: This segment includes shaving products and appliances, encompassing brands like Gillette and Braun.
- Health Care: This includes oral care, personal health, and digestive wellness products. Major brands include Crest, Oral-B, and Vicks.
- Fabric & Home Care: This encompasses fabric care, home care, and laundry products. Top brands in this segment include Tide, Downy, and Febreze.
- Baby, Feminine & Family Care: This includes products like diapers, wipes, and feminine care items. Key brands include Pampers, Always, and Tampax.
P&G’s business is global, with sales across North America, Latin America, Europe, Asia Pacific, and Africa and Middle East. They sell via a broad range of channels like wholesalers, distributors, retailers, and online outlets. The company’s ability to operate in a lot of countries gives it a big international reach.
The consumer goods sector is influenced by changing consumer preferences, innovation, competition, and regulation. The rise of e-commerce and the increasing demand for sustainable and ethical products are also important trends. Additionally, the sector is also influenced by the global economy, particularly in terms of inflation and supply chain stability.
A notable event in the third quarter of 2023 was the restructuring and impairment of the Gillette business in Latin America, which caused a 300 basis points drop in overall operating margin.
Financial Overview
Let’s take a look into the financial performance of P&G with the latest report. P&G’s Q3 2024 results, which are from January to March of 2024 show the following.
- Net sales: P&G’s net sales for Q3 2024 were $20.195 billion, with a 1% increase in the volume and mix, prices rose by 3% and currency changes decreased sales by 3%.
- Organic Sales Growth: There is strong growth of 5%, the key driver being pricing (3%). Organic volume (1%) and mix (1%) also helped.
- Core Earnings: Core earnings per share was $1.52 (a 5% increase). The effective tax rate was 21.4%.
- Gross Margin: Gross margins increased to 52.9%, primarily due to pricing and productivity efforts.
- Operating Margin: Operating margin was 21.7% and was impacted by an increase in advertising.
Here are a few more things about P&G’s financials.
- The company seems to have strong operational cash flow, adjusted free cash flow was $1.5B.
- They increased their 2024 earnings per share guidance
- The company is still paying out about half of earnings as dividends, as they repurchased $10.9B of shares from shareholders over the past year.
- The balance sheet is still very strong, as was seen by the AA ratings they received from both S&P and Moody’s.
Key financial indicators from 2023 and 2024:
| Metric | 2023 | 2024* | Change |
|---|---|---|---|
| Net Sales (billions) | $82.006 | $20.195 | - |
| Operating Income (billions) | $18.474 | $4.469 | - |
| Gross Profit Margin | 50.05% | 52.9% | +2.9% |
| Net Earnings (billions) | $14.544 | $3.403 | - |
| Earnings Per Share (Diluted) | $5.85 | $1.52 | - |
| Core Return On Invested Capital | 17.2% |
*Note: 2024 is from the report, and it is not the full year. Only 3rd quarter numbers are included.
The management emphasized several times in the last earnings call their focus on operational efficiencies and driving margin growth. They also talked about the importance of the US market and the potential for growth and share gains in developing markets. One area they seem to be focusing on is the health care segment, for which they mentioned they made recent investments and should yield great long-term benefits. They also mentioned pricing increases are being more carefully approached as they could impact consumption trends.
Moat Analysis
P&G possesses a moderate economic moat, with a rating of 3 out of 5. This is derived from:
- Brand Power: P&G’s diverse portfolio of well-known brands creates a high consumer awareness and loyalty, allowing them to generate pricing power in many product lines. However, they are not immune to private-label and competitor pressure, as seen by decreasing market share in some categories.
- Economies of Scale: As one of the world’s largest consumer goods companies, they have significant scale advantages that are reflected in supply chain management, distribution network, and efficient operations. This can lead to consistent returns and ability to absorb sudden expenses.
- Research & Development: The company also has a strong focus on innovation which allows them to continue to launch new products and improve existing ones. They spend a lot on R&D, but their R&D spending has been seen to not be that effective lately.
- Distribution Networks: While P&G has a really well-established distribution network, it also costs quite a lot to maintain that, and their high margins will almost certainly attract new players to the market in the long run.
While P&G has some wide-moat components like their brand recognition and large distribution network, they do not have a durable and unattackable moat as their competitive advantages are not impossible for competitors to replicate.
P&G’s management has repeatedly expressed a commitment to improving brand equity and innovation pipeline, suggesting a recognition of the importance of moat in maintaining a leadership position in the long run.
Risks to the Moat and Business Resilience
Here’s a look into the legitimate risks to P&G’s moat:
- Brand Erosion: Changes in consumer tastes, a rise in private-label products, or the impact of influencers on social media can weaken their brands, as seen in their beauty and personal care segments.
- Intensifying Competition: Other consumer companies are making big gains, and are a threat to P&G. New products, innovation, and prices have become increasingly hard to manage and maintain in the long run.
- Economic Pressures: Inflation and fluctuations in currencies are factors that could affect prices, margins, and sales. This would make the business and moat less sustainable and profitable in the short run.
- Innovation Failure: Lack of successful product innovations can make them obsolete in the industry. A few years ago, P&G was the king in shampoo, but now there are other brands (such as Olaplex) that are superior to P&G’s shampoo products.
- Macroeconomic Factors: Economic crises and the rise of geopolitical instability may decrease customer purchasing power, and create new challenges in the global marketplace.
Despite the above, the company has good resilience, as seen in their brand equity, a large distribution network, and focus on new products. However, the company’s reliance on debt can be a source of risk, but the management’s steps to improve their financial structure are a big plus. Also, the sheer size and scale of P&G make them less susceptible to disruption, although they are not completely immune to it.
P&G’s share price fell in Q3 of 2023 after a warning about future growth, showing a potential vulnerability to market expectations.
Understandability I am rating understandability as a 2 out of 5. Although their general business is easy to understand, P&G’s financial statements and strategic decisions can be complex, as can be seen by their diverse set of products, different geographical segments, joint ventures and brand acquisitions. Some examples are their brand rationalization strategies and complex accounting items related to derivatives and currency hedging. They also report many different sales and profit numbers which often do not conform to each other, making it difficult for average investors to properly evaluate their financials.
Balance Sheet Health I am giving their balance sheet a rating of 4 out of 5. P&G’s financial health is really strong-they are rated as AA by both S&P and Moody’s. They have a low amount of debt relative to the value of the company. Though the debt levels are generally increasing, the company has shown strong historical cash flow, which allows them to keep low risk and leverage. Their liability structure is more debt than other financial obligations such as pension and employee benefits liabilities.
P&G’s strong balance sheet, while supporting its investments, also means the company has lower leverage compared to its competitors.