Procter & Gamble stock (NYSE: PG) is up 10% since the beginning of this year, but at the current price of around $137 per share, we believe P&G stock is over valued.
Why is that? Our belief stems from the fact that Procter & Gamble stock remains about 50% higher than the low seen at the end of 2018. Our dashboard What Factors Drove 50% Change In Procter & Gamble Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.
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Procter & Gamble is one of the biggest consumer products companies in the world, manufacturing products across multiple segments such as beauty & grooming, fabric & home care, and health care. The stock rise over the past year or so came due to a 21% rise in earnings per share (EPS), helped by a 20% rise in net income and a 1% drop in the outstanding share count. Revenue rose 6% from $66.8 billion in 2018 to $71 billion in 2020.
Finally, Procter & Gamble’s Price-to-Earnings (P/E) ratio rose from 22x at the end of 2018 to 28x at the end of 2019. The P/E has dropped slightly to 27x so far this year, given the volatility of the current situation, and there is possible downside risk for Procter & Gamble’s current multiple, especially when compared with previous years: 24x at the end of 2017, and 22x as recently as 2018.
So what’s the likely trigger and timing to this downside?
The global spread of Coronavirus has meant there is higher demand for personal and home care sanitary products, but lower demand for cosmetics and grooming products as people are just not stepping out enough. P&G reported a strong FY 2020 (P&G’s fiscal year ends in June), with revenue up to $71 billion in 2020 from $67.7 billion in 2019, while adjusted EPS rose to $5.12 from $4.52 over the same period. However, we expect the demand surge for personal and home care products to subside, and foreign currency translations to weigh on net margins going forward. Also, the grooming segment is expected to continue struggling due to the emergence of strong local competitors in many countries. We believe P&G’s Q1 results in October will confirm the hit to its revenue, and could also accompany a lower 2021 guidance.
Regardless, we believe the stock will see its P/E decline from the current level of 27x to around 24x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $123.
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