Can Improved Sales Aid Procter & Gamble (PG) In Q3 Earnings?

The Procter & Gamble Company (NYSE:PG) is set to report third-quarter fiscal 2018 results on Apr 20, before market opens. Last quarter, the company delivered a positive earnings surprise of 3.48%.

In fact, this consumer goods company delivered a positive earnings surprise in each of the trailing four quarters, the average beat being 4.11%.

Factors to Consider

Weak volumes and slowing market share growth have been hurting sales of Procter & Gamble for quite some time. However, the company has been witnessing improved sales environment and thereby earnings in the recent times, thanks to higher volumes driven by innovation, proficient distribution, and in-store activity.

In the last reported quarter, sales grew 3%, increasing in 14 of the 15 largest markets and 8 out of 10 categories. Overall organic sales were up 2% comprising 2% volume growth. Market share trends are improving modestly, with Procter & Gamble holding or growing shares in 27/50 top category-country combinations (versus 22 last year). In fact, the company’s sales grew 2% in the first six months driven by 2% volume growth.

We expect this improving sales trend to follow in the to-be-reported quarter as well, driven by growth in key markets, product categories, as well as e-commerce and in-store operations. Notably, the company’s premium offerings like Olay have been registering solid growth in China. In the fiscal second quarter, Olay in China achieved its third consecutive quarter of double-digit growth.

That said, various top-line headwinds continue to persist. Overall, the soft category growth rate in developed countries and higher competition in the United States from brands like Dollar Shave Club and Harry’s Razor in the male grooming category are likely to hurt the company’s razors and blades’ sales. Again, challenges in the baby care category, lower pricing owing to increased competition in the shave care category and higher commodity costs are added woes. Meanwhile, the Algerian government’s import ban on finished products and lower subsidies in Saudi Arabia are added concerns.

Despite the above-mentioned headwinds, Procter & Gamble reiterated its fiscal 2018 sales projection. The company expects organic sales growth in the range of 2-3% for fiscal 2018. All-in sales growth is expected about 3%.

Overall, for the fiscal third quarter, the Zacks Consensus Estimate for total revenues is pegged at $16.2 billion, reflecting year-over-year growth of 3.5%.

Apart from the sales improvement, let’s take a look at the company’s margin story. Despite muted sales growth, the company has exceeded analysts’ expectations on earnings for the 11th consecutive quarter. Procter & Gamble has managed to post higher earnings despite tepid sales owing to productivity and cost-saving plans in order to boost margins, thereby lifting profit level.

However, the company failed to expand margins in the last three reported quarters, as productivity savings were more than offset by headwinds such as increased commodity costs, unfavorable geographic and product mix, and product reinvestments. Then again, the company’s focus on reducing its SG&A (selling, general, and administrative) costs, and lowering its marketing and advertising spending has helped it in supporting its operating margins to some extent. The trend is unlikely to change in the to-be-reported quarter as well.

Overall, for the quarter to be reported, the company’s margins are likely to remain subdued due to higher input costs. The company expects higher commodity costs including pulp, kerosene, ethylene and propylene to adversely impact its profitability by $300 million in fiscal 2018.

Again, unfavorable mix and lower pricing in the shave care category are likely to impact margins further. Procter & Gamble’s investing in price to drive sales of its razors and blades, due to increased competition from shave clubs, have affected its market share. Yet, productivity savings and share repurchases will partly offset these woes.

For the fiscal third quarter, the Zacks Consensus Estimate for earnings is pegged at 98 cents, reflecting growth of 2.1% year over year.

Here is What Our Quantitative Model Predicts:

Procter & Gamble does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: Procter & Gamble has an Earnings ESP of -0.58%.

Zacks Rank: The company carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about an earnings surprise.

Procter & Gamble Company (The) Price and EPS Surprise

Procter & Gamble Company (The) Price and EPS Surprise | Procter & Gamble Company (The) Quote

Stocks to Consider

Here are a few companies in the Zacks Consumer Staples sector that can be considered, as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

The Hershey Company (NYSE:HSY) has an Earnings ESP of +0.71% and a Zacks Rank #3. The company is scheduled to report quarterly results on Apr 26. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kellogg Company (NYSE:K) has an Earnings ESP of +0.10% and a Zacks Rank #3. The company is slated to report quarterly results on May 3.

Coty Inc. (NYSE:COTY) has an Earnings ESP of +2.86% and a Zacks Rank #3. The company is slated to report quarterly numbers on May 9.

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