The stock of the FMCG giant Procter & Gamble Company (NYSE: PG) fell about 4% last week after it reported fiscal 2018 first-quarter revenues below analysts’ estimates. The maker of Tide detergent, however, surpassed Wall Street’s earnings estimates. P&G also reaffirmed its fiscal 2018 growth outlook. Considering the positive impact of restructuring initiatives, we anticipate a short-term uptrend in the stock price in the days ahead. The stock of P&G closed Monday’s trading session at $87.30.
The Cincinnati-based company recorded first-quarter net sales of $16.653 billion, up 1% from $16.518 billion in the quarter ended September 2016, but lower than Thomson Reuters’ estimate of $16.698 billion. Net earnings for the July-September quarter was $2.853 billion, an increase of 5% from $2.714 billion last year. On a per-share basis, the quarterly earnings increased 10% to 1.06 per share, from $0.96 per share last year. Excluding charges, the non-GAAP earnings of $2.928 billion, or $1.09 per share, were higher than analysts’ expectation of $1.08 per share.
The sales declined mainly due to weakness in its grooming division. The revenue generated by Gillette razor business declined 5% on y-o-y business. P&G pointed out natural disasters and overall sluggishness in the US, Puerto Rico, Mexico, and Brazil markets as a reason for the poor performance of razor division. The hurricanes and earthquakes that happened in those regions also lifted the price of raw materials, thereby resulting in pressure on margins.
New entrants such as Harry’s Razors and Dollar Shave Club continue to eat into the market share of P&G with a competitive price and e-commerce based business models. P&G slashed the price of Gillette razors by nearly 12% this quarter, in order to protect its market share. However, the company continues to face severe headwinds in that business division. More worrisome is the fact that Amazon is preparing to bring out a vast array of products with a private-label.
The weakness in the razor division highlights the criticism made by activist investor Peltz, CEO of Trian Fund Management. Peltz, who oversees $3.50 billion worth of P&G stocks, has blamed the company for lack of innovation and argued that it needs fresh ideas. However, Peltz, the sixth-largest shareholder of P&G, failed in his effort to get a seat on the board. P&G argues that it is in the process of a turnaround and needs some more time to see the results.
The brand owner of Olay soap, Crest toothpaste, and Bounty paper towels, however, reported strong growth in China. In particular, the sale of skin and health care products, including electric toothbrushes, increased considerably. P&G also reaffirmed its FY18 outlook for organic sales growth in the range of between 2% and 3%.
The first-quarter results were not exceptional. However, P&G has started seeing the results of its cost-cutting program, improved execution, and focused investments. Thus, fundamentally the stock is expected to bounce back soon.
The stock has found support at 87, as shown in the price chart below. Further, the RSI indicator is in the oversold region. Thus, we anticipate a bounce back in the share price.
To benefit from the uptrend, we may invest in a call option valid for a period of one week. We would proceed with the investment only if the stock is trading at about $88 on the NYSE.
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