Strong Q3 2021 Earnings To Drive Procter & Gamble Stock To Recent Highs

Up only around 35% from its low in March 2020, at the current price of $131 per share, we believe Procter & Gamble stock (NYSE: PG) has strong upside potential. P&G stock has increased from $98 to $131 off the recent bottom, much less than the S&P which increased by around 85% from its lows. Further, the stock is up only 2% from the level it was at before the pandemic, and we believe that P&G stock could regain its 2020 high of $146, rising more than 10% from its current level of $131, driven by expectations of continuing demand growth and strong Q3 2021 results. Our dashboard What Factors Drove 43% Change In Procter & Gamble Stock Between 2017 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2017-end came due to a 9% rise in revenue from $65 billion in FY 2017 to $71 billion in FY 2020. However, net margins dropped from 23.6% to 18.4%, leading to a 12% drop in EPS from $5.80 in FY 2017 to $5.13 in FY 2020, despite a 4% decrease in the outstanding share count.

P&G’s P/E (price-to-earnings) multiple rose from 16x in 2017-end to 27x by 2020 end, but has since dropped to 25.6x. 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 second half of FY 2020 (P&G’s fiscal year ends in June), but with supply chain activities back on track, revenue jumped by 5% from $17.2 billion in Q3 2020 to $18.1 billion in Q3 2021. Operating income, too, rose by 10% and led to a strong rise in EPS from $1.15 to $1.30 over the same period. Further, for the first nine  months of FY ’21, revenue is up around 8% at $57.2 billion, from $53.3 billion for the same period in FY 2020. EPS over this period has witnessed a jump of more than 10% and currently stands at $4.53 for the first nine months of FY 2021.

With the ongoing vaccinations and economies opening up worldwide, 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 more than 10% 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.

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