Don’t Overpay for This Stock

We’ll bet you $100 that P&G has touched your life.

Its sheer size and array of brands make it almost impossible not to be aware of them.

And with a decade of almost uninterrupted revenue growth, including during the pandemic, this is a natural fit for most investment portfolios.

However, Charlie Munger always said you should buy a great company at a decent price.

P&G is a great company.

However, we’d argue its price is too high.

This is why….

P&G’s Business

Headquartered in Cincinnati, Ohio, P&G operates a global consumer goods empire, catering to the day-to-day needs of consumers with a diverse array of trusted brands. 

From household cleaning agents to personal care products, the company’s offerings are integral to the fabric of consumer society.

Source: P&G Q2 2024 Earnings Presentation

P&G divides its brands across 5 categories:

Beauty (18% of total revenues) – Encompasses Hair Care and Skin & Personal Care, featuring brands like Head & Shoulders and Olay.

Grooming (8% of total revenues) – Includes Shave Care and Appliances, with notable brands such as Gillette and Braun.

Health Care (14% of total revenues) – Covers Oral Care and Personal Health Care products, including Crest and Vicks.

Fabric and Home Care (35% of total revenues) – Spans Fabric Care and Home Care, highlighted by Tide and Febreze.

Baby, Feminine and Family Care (25% of total revenues) – Offers Baby Care, Feminine Care, and Family Care products with brands like Pampers and Always.

P&G earnings lept 16% YoY in the latest quarterly report, driven by organic sales up 4% while organic volume was down 1%.

This speaks to the continued pricing power that feeds global inflation.

However, the company took a $2.1 billion non-cash impairment as management downgraded future growth and profitability for the business.

Still, the 2024 outlook was optimistic with organic sales growth up 4%-5% offset partially by currency impacts, and core EPS up 8%-9%.

Source: P&G Q2 2024 Earnings Presentation

Financials

Source: Stock Analysis

Since 2017, P&G’s revenues have grown every year. 

True, it wasn’t by much. But margins expanded steadily, especially free cash-flow margins.

Total debt has remained relatively steady, growing from $30.1 billion in 2019 to $33.7 billion in the latest report.

During that same period, total shares outstanding decreased by 6%, while dividend payouts, which stopped between 2018-2020, resumed at a rate of $8.3-$9.0 billion per year, or a yield of about 2.5% annually.

Overall, the company is doing well at reducing costs and managing its balance sheet.

Valuation

Source: Seeking Alpha

P&G’s quality earnings don’t come cheap.

If you pick up shares here, you’re paying almost 25x earnings and over 19x operating cash flow.

That’s a touch higher than Pepsi (PEP) on both counts.

While Coty Inc (COTY) is slightly more expensive on an earnings multiple, it, along with Kimberly Clark (KMB) and Unilever (UL), are all cheaper on a cash multiple.

Growth

Source: Seeking Alpha

P&G’s growth is steady but not fantastic.

Your heavy price gets you just under 5% revenue growth per year and slightly less on EPS growth.

On the other hand, Pepsi delivers growth at a better valuation.

Even Unilever has better revenue growth, though not on earnings.

Profitability

Source: Seeking Alpha

Still, you can’t argue with P&G’s margins, which are fantastic.

No one matches its almost 16% free cash flow margin or its 18% net income margin.

However, its equity returns are lower than Pepsi, Kimberly Clark, and Unilever. But it’s more balanced in terms of returns on assets and total capital.

Our Opinion 6/10

While P&G is a fantastic company, we don’t advocate overpaying for consumer goods companies with low growth.

We’d be interested if P&G were to trade closer to $130 a share.

We’d pass in favor of other companies like Pepsi at its current price.