Procter & Gamble (PG) has been one of the most searched stocks on Zacks.com lately. So, you should look at some of the facts that could affect the stock’s performance in the short term.
Shares in the world’s largest consumer goods maker have returned +11.1% over the past month, while the Zacks S&P 500 Composite has returned +7.5%. The Zacks soap and detergents industry, which includes P&G, is up 12.4% over the period. The key question now is: Where could the stock head in the short term?
Although media reports or rumors of a significant change in a company’s business prospects usually cause the stock to trend and result in an immediate price change, there are always certain fundamental factors that ultimately drive the buy-and-hold decision.
Revisions to earnings estimates
Rather than focusing on anything else, at Zacks we prioritize assessing the change in a company’s earnings outlook. This is because we believe the fair value of its stock is determined by the present value of its future income streams.
Essentially, our analysis is based on how sell-side analysts who cover the stock revise their earnings estimates to reflect the latest business trends. As earnings estimates for a company increase, so does the fair value of its stock. And when a stock’s fair value is higher than its current market price, investors tend to buy the stock, causing its price to move higher. For this reason, empirical studies indicate a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
P&G is expected to report earnings of $1.57 per share for the current quarter, a -5.4% year-over-year change. In the last 30 days, the Zacks consensus estimate has changed by -0.5%.
For the year-to-date, the consensus earnings estimate of $5.83 points to a change of +0.3% year-on-year. In the last 30 days, this estimate has changed by -0.2%.
For the next fiscal year, the consensus earnings estimate of $6.23 indicates a +6.9% change from what P&G is expected to report a year ago. Over the past month, the estimate has changed by -0.6%.
Our proprietary stock ranking tool, the Zacks Rank, has a strong, third-party audited track record and provides a more meaningful picture of a stock’s near-term price action by effectively harnessing the power of earnings estimate revisions. P&G is rated Zack’s #3 (Hold) based on the magnitude of the recent consensus estimate change, along with three other factors related to earnings estimates.
The chart below shows the development of the company’s 12-month consensus EPS estimate:
12 Month EPS
Sales Growth Forecast
As such, while earnings growth is arguably the best indicator of a company’s financial health, nothing happens when a company is unable to grow its earnings. After all, it’s nearly impossible for a company to grow its profits over a sustained period of time without increasing sales. Therefore, it is important to know a company’s potential revenue growth.
In the case of P&G, the consensus estimate of $20.52 billion in revenue for the current quarter suggests a -2.1% change from a year earlier. Estimates of $79.4 billion and $82.53 billion for year-to-date and next fiscal year indicate changes of -1% and +3.9%, respectively.
Latest reported results and surprise history
P&G reported revenue of $20.61 billion for the most recent quarter, a +1.4% year-over-year change. EPS of $1.57 for the same period compared to $1.61 a year ago.
Compared to the Zacks Consensus estimate of $20.45 billion, reported earnings represent a surprise of +0.77%. EPS surprise was +1.29%.
In the past four quarters, P&G has beaten consensus estimates for earnings per share three times. The company beat consensus sales estimates every time during this period.
No investment decision can be efficient without considering a stock’s valuation. When predicting the future price development of a stock, it is crucial to determine whether its current price accurately reflects the intrinsic value of the underlying business and the company’s growth prospects.
Comparing the current values of a company’s valuation multiples, such as price-to-earnings (P/E), price-to-sales (P/S), and price-to-cash flow (P/CF), with its own historical values will help determine if the stock is fair valued, overvalued or undervalued. Comparing the company versus its peers using these parameters gives a good sense of the reasonableness of the stock price.
The Zacks Value Style Score (part of the Zacks Style Scores system), which pays close attention to both traditional and unconventional valuation metrics to rank stocks from A to F (an An is better than a B; a B is better than a C; etc.) is quite helpful in determining whether a stock is overvalued, correctly valued, or temporarily undervalued.
P&G is rated D on this front, indicating it’s trading at a premium to its peers. Click here to view the values of some of the assessment metrics that led to this grade.
The facts discussed here and plenty of other information on Zacks.com could help determine whether or not the market clamor surrounding P&G is worth paying attention to. However, its No. 3 Zacks rank suggests that it could move in line with the broader market in the near future.
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