Proprietary Data Insights
Financial Pros Consumer Packaged Goods Searches in the Last Month
Food Delivery & Mobility
You’re Already an Expert on This Investment
Legendary investor Peter Lynch once said to invest in what you know.
Warren Buffett has subscribed to this theory, leading to decades of market-beating returns.
With so many investors losing money in tech stocks they know little about, maybe it’s time to follow Lynch’s advice.
One category everyone should be familiar with is household products.
And financial pros have been eyeing Procter & Gamble (PG), making it their most searched stock in the household products category over the last month.
It’s a staple of many portfolios, with institutions owning 65.58% of shares and the public owning the remainder.
The company is a go-to for its consistent revenue generation and reliable business.
So should you add it to your portfolio?
Procter & Gamble’s Business
Procter & Gamble is the largest company in the household products industry, with a market cap north of $320 billion.
It carries many well-known brands in its portfolio, including Old Spice, Head & Shoulders, Crest, Gillette, Vicks, Pepto-Bismol, Downy, Tide, Febreze, Pampers, Tampax, Bounty, and Charmin.
The company segments its business into the following categories: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
PG sells its products across the globe, but 49% of its sales come from North America.
Europe accounts for 21% of its sales, followed by Greater China at 10%, Asia-Pacific at 8%, Latin America at 6%, and India, Middle East, and Africa at 6%.
Globally, Unilever (UL) is better known, with a larger presence in Europe than Procter & Gamble.
PG has grown revenues consistently since 2018.
The firm’s revenues went from $66.8 billion in 2018 to $80.1 billion in 2022.
During the same period, management raised the stock’s dividend from $2.78 to $3.52 a share annually.
Moreover, its gross profit rose from $32.4 billion to $38 billion.
The company has an operating cash flow of $16.1 billion.
However, it has total cash of $6.7 billion and total debt of $33 billion. The firm’s current ratio of 0.6x could be better.
But it’s not unusual for a company of this size. Plus, PG generates over $16 billion in cash from operations and more than $10 billion when you exclude capital expenditures.
PG has a P/E GAAP ratio of 23.23x, which aligns with its five-year average of 24x and is comparable to most of its peers.
Kimberly-Clark (KMB) comes in at 22.21x and UL at 19.15x, making them slightly cheap.
Church & Dwight (CHD) is a touch more expensive at 24.64x, while Clorox (CLX) is far more expensive at 39.32x.
PG trades at a relatively high price-to-sales ratio of 4.02x. Every other competitor we named is better, with KMB and UL the cheapest at 2.08x and 1.98x respectively.
And PG doesn’t beat many with its 19.79x price-to-cash-flow ratio, especially with KMB at 14.97x and UL at 13.74x.
PG beats all its peers with a stunning gross profit margin of 47.23%.
It also trounces everyone with its EBITDA margin of 26.55% and net income margin of 18.11%.
While KMB has a 280.15% return on equity, that’s more an aberration than a true representation of the company’s performance.
Excluding KMB, PG comes in second to CLX’s 71.31% with its 32.25% ROE.
It’s interesting to see how the surge in demand for cleaning products during COVID has played out now that life has mostly returned to normal.
PG had positive revenue growth of 4.31% YoY. But KMB and UL did better. Interestingly, CLX’s revenue declined. And remember, Clorox was one of the most active players in the cleaning products space.
We like PG’s five-year average revenue growth of 4.3%, which is below only CHD’s at 7.84%.
However, it’s concerning to see PG’s levered free-cash-flow growth decline on average over the last three years. But when we take that together with the firm’s peers’ performance, it implies inflationary pressures pressuring margins in recent quarters.
Our Opinion 7/10
This was a tough one.
While Procter & Gamble is a great company with a long history, it’s relatively expensive.
And for companies like P&G that don’t grow more than single digits, price really matters.
PG isn’t overly expensive at about $133 per share at writing. But we’d prefer to start a position around $120 per share or lower.
News & Insights
Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here