Up only around 25% from its low in March 2020, at the current price of $123 per share, we believe Procter & Gamble stock (NYSE: PG) has significant upside potential. P&G stock has increased from $98 to $123 off the recent bottom, much less than the S&P which increased by around 70% from its lows. Further, the stock is around the same level it was at before the pandemic, and we believe that P&G stock could regain its 2020 high of $146, rising almost 20% from its current level around $123, driven by expectations of strong demand and strong Q2 2021 results despite the pandemic. Our dashboard What Factors Drove 34% Change In Procter & Gamble Stock Between 2018 And Now? has the underlying numbers behind our thinking.
The stock price rise since 2018-end came due to a 6% rise in revenue from $66.8 billion in FY 2018 to $71 billion in FY 2020. Further, net margins rose from 14.6% to 18.4%, driving a 37% rise in EPS from $3.75 in FY 2018 to $5.13 in FY 2020, helped by a 2% decrease in the outstanding share count.
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P&G’s P/E (price-to-earnings) multiple rose from 25x in 2018 to 27x by 2020 end, but has since dropped to 24x, as the markets are pulling back from recent highs. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.
Where Is The Stock Headed?
The global spread of Coronavirus saw a drop in Procter & Gamble’s revenues and earnings in the first half of 2020, but with supply chain activities back on track, revenue jumped to a strong $39 billion for 1H 2021 (PG’s fiscal year ends in June), up from $36 billion in 1H 2020. Further, the company managed to control expenses, driving EPS up to $3.22 from $2.88 for the same period, a jump of around 12%.
Despite the pandemic, we believe P&G will continue seeing steady revenue growth, and if the company continues to control expenses successfully, this will raise investor expectations further, driving up the company’s P/E multiple. We believe that PG stock can rise almost 20% from current levels, to regain its recent high of $146.
While Procter & Gamble stock does seem attractive, 2020 has created many pricing discontinuities which can offer further trading opportunities. For example, you’ll be surprised how the stock valuation for Mondelez International vs Tempur Sealy International shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.