Procter & Gamble remains a buy after its mixed quarter hurt by the strong dollar
Procter & Gamble (PG) on Friday morning reported mixed results for its fiscal fourth-quarter of 2022. The consumer products giant reported net sales of $19.52 billion, a 7% organic gain over last year and above the $19.41 billion expected. Earnings per share were $1.21 adjusted, lower than the consensus estimate of $1.23. After the announcement, P & G shares dropped more than 6%, but we used the pullback to buy addition shares of this recession-resistant stock. Bottom line As noted in our commentary explaining the P & G share purchase, the quarter was telegraphed in advance by management. Due to the well-known currency and commodity challenges, we believe the full-year guidance provided for fiscal 2023, though slightly below expectations, was the reset needed to ultimately stabilize the stock. We see the guide as somewhat conservative on management's part and think we'll see raises throughout the fiscal year should the U.S. dollar weaken and commodity prices fall further. This dynamic should also serve to support gross margin expansion, with costs coming down and recent product price increases remaining sticky. As a result, and clearly indicated by our decision to purchase additional shares following the release, we reiterate our 1 rating , meaning we see P & G as a buy at current levels. Given the updated earnings guidance, we are reducing our price target slightly to $165 from $175. Companywide results Procter & Gamble was able to demonstrate strong pricing power — but it, once again, suffered from higher input costs, resulting in a gross margin drop of 370 basis points year over year (330 basis points on a currency-neutral basis). Driving the decline was a 390 basis point improvement resulting from higher prices that was more than offset by a 450 basis point increase in commodity costs, an 80 basis point increase in freight costs, a 40 basis point increase in other costs net of productivity savings, a 20 basis point hit from product and package reinvestments, and a 130 basis point headwind from negative product mix. That in mind, management was able to blunt the blow by reducing selling, general and administrative expenses as a percentage of revenue by 340 basis points (350 basis points on a currency-neutral basis), so operating margin only fell by 30 basis points (and was up 20 basis points on a currency-neutral basis). Operating cash flow of $3.71 billion came up short versus the $4.96 billion consensus while adjusted free cash flow productivity, defined as the ratio of adjusted free cash flow to net earnings, came in at 99% for the quarter. Lastly, management returned a total of $3.5 billion in cash to shareholders via its dividend and buybacks. Segment performance Procter & Gamble is behind some of the biggest products that people need to use everyday, such as Tide laundry detergent, Bounty paper towels, Gillette shaving essentials, Crest toothpaste, and Pampers for babies. Here's a breakdown by category for the quarter. Beauty sales of $3.46 billion, unchanged year over year on an organic basis, missed the $3.51 billion consensus. Skin and personal care segment saw a low single digit organic sales decline as a result of a less favorable sales mix that was partially offset by higher prices and volume growth. Hair care sales increased in the low single digits organically as higher pricing was partially offset by lower volumes resulting from Covid-related lockdowns in China and a reduction of operations in Russia. Grooming sales of $1.61 billion, an increase of 3% organic year over year, came up short versus expectations of $1.69 billion. Shave care organic sales were up mid single digits thanks to higher prices that were partially offset by volume declines resulting from China lockdowns. Appliances saw a high single digit organic sales decrease as the prior year's period was bolstered by a pandemic-related consumption increase. Product mix was positive and served to blunt some of the difficult comp headwind. Health care sales of $2.51 billion, an increase of 9% organic over the prior year, were better than the $2.38 billion consensus. The segment benefited from a high single digit organic increase in oral care products thanks to price increases and a positive product mix that was partially offset by lower volumes due to China lockdowns and market contraction in developed markets. Personal health care sales grew in the mid-teens percent with management citing "broad-based driven by positive mix from the disproportionate growth of respiratory products, increased net pricing and volume growth due to a stronger respiratory season versus year ago." Fabric and home care sales of $6.88 billion, up 9% organic, outpaced expectations of $6.83 billion. Fabric care organic sales were up double digits on the back of price increases, though innovation driven volume gains were offset by declines resulting from reduced operations in Russia. Home care posted a low single digit increase in organic sales thanks to higher prices and a positive product mix, though this was partially offset by a "market contraction versus a base period that benefited from pandemic-related consumption increases." Baby, feminine and family care sales of $4.82 billion, up 7% organic, exceeded the $4.79 billion consensus. Baby care sales increased mid single digits organically thanks to higher prices that were partially offset by lower volumes due to reduced Russian operations and competition in developed markets. Feminine care organic sales were up in the low teens range with growth in all regions driven by pricing power and a positive product mix, though this was partially offset by a reduction in Russian operations. Family care organic sales were up mid single digits thanks to higher prices and volume growth as well as increased promotional activity. Guidance Looking ahead, management guided for fiscal year 2023 sales to be flat to up 2% versus the prior fiscal year, versus a 1.9% consensus estimate. After accounting for a 3% foreign exchange headwind, organic growth is expected to be in the range of 3% to 5%, a bit short versus the 5.2% organic growth the Street was looking. Fiscal year 2023 earnings-per-share guidance of $5.93 (at the midpoint of the flat-to-up 4% growth range management expects), below the $6.02 estimate coming into the print. Notably, this forecast incorporates a $3.3 billion after-tax hit, or $1.33 per share, headwind from unfavorable FX, higher commodity costs, and freight costs. The bulk of these charges are expected in the first half of the fiscal year. Regarding shareholder capital returns, the team expects adjusted free cash flow productivity of 90% and to pay over $9 billion in dividends and repurchase $6 billion to $8 billion of common shares in the fiscal year. (Jim Cramer's Charitable Trust is long PG. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Tide, a laundry detergent owned by the Procter & Gamble company, is seen on a store shelf on October 20, 2020 in Miami, Florida. Joe Raedle | Getty Images