PG reported Q3 EPS this morning, beating consensus by $0.03 per share, largely on the strength of cost savings. However, Q4 guidance was below the Street, which is odd as the company essentially maintained (took up the low end by $0.02) its full-year view (updated for Venezuela on 2/21). There seems to be some bad sell-side math involved, but regardless, the market isn’t treating the stock all that kindly today after what has been a very good recent run. At 14% of the XLP, PG’s weakness is dragging the broader staples sector lower, displaying significant underperformance relative to the broader market.
Some folks we have spoken with have called PG the canary in the coal mine with respect to the staples rally, but we aren’t quite there yet. While PG’s results were “meh”, we don’t think they are sufficient to derail what have been the primary drivers of the strong performance of the staples group – yield, low volatility, as well as expectations that the group is poised for top-line improvement and margin expansion.
However, we don’t believe that CL’s results (tomorrow) will be a positive catalyst for the broader staples group. Meanwhile, MO’s print should be constructive for the best performing staples sector on our screen today (tobacco). All things considered, we continue to see limited upside to estimates across the staples group for the next one to two quarters.
What we liked:
- Beating EPS estimates is always better than the alternative
- +3% organic sales growth is consistent with the company’s year to date performance
- Productivity savings continue to provide income statement flexibility
- Continued strong U.S. market share performance
- Higher marketing spend in the quarter
What we didn’t like:
- Q4 guidance was weak relative to consensus, but that seems to be bad modeling on the part of analysts
- Company seems to be playing games with organic sales growth guidance – full year stays at 3-4% despite having reported +2% in Q1 and +3% in Q2 and Q3 – 4% is all but impossible at this point. On the flip side, on Q2, the company took up its full-year organic sales growth guidance to 3% to 4% from 2% to 4% when it became apparent that 2% growth was unlikely. Full year sales growth guidance should have gone to 2-3%, with one quarter remaining.
- Pace of gross margin improvement slowed
- Only modest improvement in FCF (+$32 million year over year)
We don’t know for sure that the fat lady has started singing for the staples group, but what we do know is that, at some point, valuation will matter and that someone should at least let the fat lady know that we are going to need her sooner rather than later.
Call with questions as we have run out of colloquialisms,
Rob
Robert Campagnino
Managing Director
HEDGEYE RISK MANAGEMENT, LLC
Matt Hedrick
Senior Analyst