Procter & Gamble (NYSE: PG)
, a consumer staples giant, reported a solid third quarter of fiscal 2024 (Q3 FY24) with organic revenue growth of 3% and core EPS growth of 11%. These results were driven by a mix of 0% growth in volumes and 3% growth in price/mix.The most significant takeaway from the quarter is the moderation of cost pressure stemming from input costs, logistics, and labor. This indicates that the company is on the right track for volume recovery as inflation starts to ease.
Looking forward to fiscal 2025 (FY25), I believe that Procter & Gamble will achieve a balanced growth between volume and price. The falling commodity prices, as illustrated in the chart below, will likely continue to benefit the company in FY25. With less pressure from input costs, Procter & Gamble is more likely to adjust its overall pricing lower to stimulate volumes.
As such, I estimate that Procter & Gamble can achieve 3% price/mix growth and 2% volume growth in FY25. The company also plans to pay out $9 billion in dividends and repurchase $5-$6 billion of its own shares in FY24, totaling $14-$15 billion in shareholder returns. This will likely result in a 2% decrease in the total number of shares outstanding.
Based on my revised assumptions and a WACC of 7.21%, I estimate Procter & Gamble’s fair value to be $175 per share. The current stock price is trading at around 23x of forward free cash flow. I view Procter & Gamble as a high-quality and stable company with solid organic revenue growth and double-digit EPS growth, and I believe that a 23x multiple of FCF is not expensive.
Key Risks
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Foreign Exchange:
The strength of the USD is expected to have a negative impact on Procter & Gamble’s reported revenue and operating margin.*
Destocking in US:
Procter & Gamble has encountered some destocking activities in the U.S. market across certain product categories, which may present some growth headwinds in the near term.Conclusion
I maintain Procter & Gamble in my portfolio as a defensive stock due to its high quality and stability. I believe the company is well-positioned to transition towards a more balanced price and volume growth in the near future, and the falling commodity price could benefit their margin expansion. The current stock price remains attractive, and I reiterate a ‘Buy’ rating with a fair value of $175 per share.
