Procter & Gamble Stock Overpriced?
Up more than 40% since March, we believe Procter & Gamble stock (NYSE: PG) could see some downside. PG stock is up a little over 10% from the level it was at, at the start of 2020. It traded at $125 in February 2020 – just before the outbreak of coronavirus – and is currently more than 10% above that level, as well. Further, due to mixed demand for its products, the stock has the potential to drop 10% to its pre-Covid level of around $125. Our conclusion is based on our comparative analysis of Procter & Gamble stock performance during the current crisis with that during the 2008 recession in our interactive dashboard.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 70% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
In contrast, here is how PG stock and the broader market fared during the 2007-08 crisis.
Timeline of 2007-08 Crisis
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- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
PG and S&P 500 Performance Over 2007-08 Financial Crisis
We see PG stock declined from levels of around $71 in October 2007 (pre-crisis peak) to levels of around $48 in March 2009 (as the markets bottomed out), implying PG stock lost over 30% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of $61 in early 2010, rising by around 26% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.
PG Fundamentals Over Recent Years
PG revenues increased from $65 billion in 2017 to $71 billion in 2020 (P&G’s PG fiscal year ends in June). Despite an increase of around 10% in revenues, EPS dropped from $5.80 in 2017 to $5.13 in 2020, and EPS for the last 4 quarters stands at around $5.41.
Does PG Have Enough Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
PG’s total debt dropped from $13.6 billion in 2017 to $11.2 billion in 2020, but its total cash rose from around $5.6 billion to $16.2 billion over the same period. Further, the company generated around $17.4 billion cash from operations in fiscal 2020. A strong cash cushion combined with a steady operating cash flow, provides the company the means to deal with the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- July-November 2020: Weak Q2 and Q3 results, but continued improvement in demand and progress with vaccine development buoy market sentiment
With the recent surge in the number of new Covid-19 cases in the U.S., and the rapid shift to a work from home culture, we expect demand for some of P&G’s products to stay low in the near to medium term, namely from the beauty and grooming segments. This will most likely weigh down the rise in demand for personal and home care products and the mixed impact of this could prevent P&G from seeing any revenue growth in the near term. We believe that PG stock has around 10% potential downside in the near term, and even as the lockdowns are gradually lifted, revenues from the beauty and grooming segments seem unlikely to rise anytime soon.
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