Procter & Gamble's Weak Second Quarter Earnings Has Sent Its Shares Lower - Is Now The Time To Buy?

| About: The Procter (PG)

Summary

Q2 2015 earnings were released on January 27.

Earnings per share and revenue fell short of expectations.

Organic sales increased 2%.

Global volume remained flat.

The stock has responded by falling over 2%.

Procter & Gamble (NYSE: PG), the world's largest manufacturer and distributor of consumer packaged goods and the company behind brands such as Tide, Charmin, Crest, Pampers, and Dawn, announced second quarter earnings this morning and its stock has responded by falling over 2%; let's take a closer look at the results and the company's outlook going forward to determine if we should consider using this weakness as a long-term buying opportunity or if we should look elsewhere for an investment instead.

The Weaker-Than-Expected Results

Here's a summary of P&G's second quarter earnings compared to what analysts had expected and its results in the second quarter a year ago:

Metric Reported Expected Year Ago
Earnings Per Share $1.06 $1.14 $1.15
Revenue $20,161 million $20,702 million $21,099 million

P&G's earnings per share decreased 7.8% and its revenue decreased 4.4% compared to the second quarter of fiscal 2014, as organic sales increased 2%, pricing increased 1%, and global volume remained flat. Here's a breakdown of the company's revenues, revenue growth, volume growth, and pricing change by segment (revenue in millions):

Segment Q2 2015 Revenues % Revenue Change From Year Ago Adjusted Volume Change From Year Ago Pricing Change From Year Ago
Beauty, Hair, and Personal Care $4,962 (6%) (2%) 1%
Grooming $2,007 (5%) (2%) 4%
Health Care $2,088 (3%) (2%) 0%
Fabric Care & Home Care $5,775 (4%) 2% 1%
Baby, Feminine, & Family Care $5,217 (2%) 0% 1%
Corporate $112 N/A N/A N/A
Totals $20,161 4.4% 0% 1%

P&G's gross profit decreased 5.1% to $10,078 million and its operating profit decreased 8.3% to $3,947 million in the second quarter, as its gross margin contracted 40 basis points to 50% and its operating margin contracted 80 basis points to 19.6%. However, it is also worth noting that excluding certain items, P&G's core gross margin contracted 20 basis points to 50.4% and its core operating margin contacted 60 basis points to 20.2%. These weak results can be attributed to costs of products sold and selling, general, and administrative expenses decreasing just 3.7% and 3.0%, respectively, both of which did not bode well with the company's 4.4% decrease in revenue.

For the quarter, P&G generated $3,435 million in net cash provided by operating activities and invested just $832 million in capital expenditures, resulting in a healthy $2,603 million of free cash flow; the company utilized this free cash, and the $7,486 million in cash and cash equivalents on its balance sheet to begin the quarter, to repurchase approximately $1,875 million worth of its common stock and pay out $1,808 million in dividends. The company ended the quarter with $8,204 million in cash and cash equivalents, so it is well positioned to accelerate repurchases or raise its dividend in the second half of the year.

Lastly, as a result of its performance in the first six months of the year, P&G reiterated its currency-neutral core earnings per share growth and organic sales growth guidance ranges for fiscal 2015, but lowered its core earnings per share growth outlook; here's a summary of what it now expects to accomplish:

  • Currency-neutral core earnings per share growth in the double-digit percentage range.
  • Core earnings per share are expected to be flat to down in the low-single digit percentage range, and this down from its previous outlook of growth in the mid-single digit percentage range.
  • Organic sales growth in the low-to-mid single digit percentage range.

Should You Buy P&G On The Dip?

Procter & Gamble is the world's leading manufacturer and distributor of consumer packaged goods, but decreased demand for its products and unfavorable impacts from foreign exchange led it to a disappointing second quarter performance; the company reported year-over-year declines in earnings per share, revenue, gross profit, and operating profit, while its margins contracted, and its stock has responded accordingly by falling over 2%.

Although I think the post-earnings weakness in P&G's stock is warranted, I also think it represents a great long-term buying opportunity, because it trades at inexpensive forward valuations; take a look at this chart of analysts' estimated earnings per share for fiscal 2016 through fiscal 2018, and the stock's current price-to-earnings multiple based on these estimates:

Year Fiscal 2016 Fiscal 2017 Fiscal 2018
Estimated EPS $4.53 $4.84 $5.23
Current P/E Multiple 19.3 18.1 16.7

As the chart above shows, P&G's stock trades at about 19.3 times fiscal 2016's estimated earnings per share, just 18.1 times fiscal 2017's estimates, and only 16.7 times fiscal 2018's estimates, all of which are inexpensive compared to its five-year average price-to-earnings multiple of 19.6.

Furthermore, P&G has shown a strong dedication to maximizing shareholder value through dividend payments and share repurchases. The company pays an annual dividend of $2.5744 per share, giving its stock a bountiful 2.95% yield at current levels, and it has increased this dividend for 58 consecutive years. Also, the company has repurchased shares at a consistent rate over the last several years, including approximately $5.99 billion in repurchases in fiscal 2013 and approximately $6.01 billion in repurchases in fiscal 2014, and it is on pace for over $8 billion in repurchases in fiscal 2015.

With all of this information in mind, I think today's decline in Procter & Gamble represents a picturesque long-term buying opportunity, so investors should take a closer look and strongly consider initiating positions, and adding to them on any further weakness provided by the market.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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