PG stock has overtaken $155 resistance
My thesis for this article is quite straightforward. First, I will argue from a technical perspective that The Procter & Gamble Company (NYSE:PG) stock has recently overtaken a multi-year resistance level near $155. And secondly, I will argue that there are fundamental ongoing catalysts that could push its stock prices even higher.
I will start with the technical analyses. The chart below shows PG’s trading pattern in the past 5 years on a weekly basis. The top panel describes its price-volume trading information and the 20-week moving average price. The bottom panel shows its Relative Strength Index ("RSI"). As seen, the stock has challenged the $115 level (shown by the blue dashed line) multiple times since 2022 and was not successful until recently. Currently, its stock price of $166 stands well above this multi-year resistance level.
There are a few other bullish signs that indicate this is a successful breakout. The first sign is that PG stock is also trading above its 20-week moving average (around $157) by a good margin, a classic technical indicator of bullish momentum. The second sign involves the RSI for the stock. The RSI is a momentum indicator that measures the speed and change of price movements. Currently, the RSI for PG is at 67.42, close to be threshold of 70 which is typically considered oversold. Moreover, the fact that the RSI itself has been trending upward recently suggests that there is still some momentum behind the stock and that it could continue to move higher in the near term.
Finally, I want to draw your attention to the volume-price bar highlighted by the green rectangle. This bar shows the price range that has attracted the largest trading volumes since 2022, and it happens to be around $150 and $155. To me, the fact that PG’s current price is noticeably above $155 suggests that the larger number of investors/traders in the $150-$155 window have now either been replaced by or have become more bullish ones, preparing the stage for the stock prices to mover further up.
Next, I will elaborate on the fundamentals that could support higher prices.
PG stock’s valuation is still reasonable
I will start with valuation. Despite the near all-time-high prices, the stock is trading at reasonable valuations in my view thanks to its robust EPS growth.
The table below summarizes PG stock’s valuation grade in comparison to the sector median and its 5-year average levels. First, PG's P/E ratios are (and have been most of the time historically) much higher than the sector median, which could feel off-putting to some investors. For example, the P/E ratio (on TTM and non-GAAP) for PG is currently 25.38x, while the sector median is 18.24. This represents a 39.13% premium.
However, I think the premium is well justified (more on this in a minute) and thus a comparison against its own historical average is more reasonable. And a vertical comparison suggests fair valuation (or even slightly discounted valuation). For example, its P/E ratio (again on TTM and non-GAAP) is only 0.45% above its 5-year average P/E ratio. On an FWD basis, its P/E ratio of 25.43 is only 3.76% above its 5-year average P/E ratio.
Although as a quintessential example of a dividend growth stock, I view its dividend yields as a more reliable valuation indicator than P/E. As seen, PG's dividend yield (TTM) is 2.30%. The 5-year average dividend yield for PG is 2.42%. The current yield is thus 5.05% higher than its historical average, suggesting a small undervaluation.
PG stock: profitability outlook
Now, let me get back to the reasons why I think PG’s valuation premium over the sector is well justified. Compared with the average sector, PG stands out thanks to many key differentiating factors. And the top two in my view are its focus on innovation and brand strength. Thanks to its scale and strong cash generation, PG invests heavily in research and development (“R&D”) to develop new and improved products that meet evolving consumer needs. As a result, PG boasts a portfolio of some of the most iconic brands, like Tide and Pampers, that have built strong brand loyalty over decades.
This brand recognition allows them to command premium prices and maintain market share even during economic downturns, as reflected in the chart below. As seen, its profitability is simply superb, and vastly better than the sector average by every metric.
Looking ahead, I see the trend to continue. Management estimates fiscal 2024 capital spending will be 4% of sales. Innovation and product development should remain a priority. I also expect P&G to keep its focus on building brand equity. At the same time, I see good odds for its margins to further improve from the current already-terrific levels. Its ongoing productivity enhancements should aid operating margins. And I also expect pricing initiatives to continue to aid returns and bolster profit margins. Its management also began recently to restructure its product portfolio, primarily in Argentina and Nigeria. These restructuring efforts may divest operations in these markets. I anticipate these moves should enable P&G to address the macroeconomic and fiscal challenges in those regions, helping the bottom line in the years to come.
Downside risks and final thoughts
In terms of downside risks, the reconstruction efforts just mentioned could cause some near-term additional costs. My estimate is that these efforts probably would cost the company somewhere between 1.0 billion-$1.5 billion in restructuring charges in FY 2024 and 2025. Another risk comes from the ongoing inflation pressure. Like many other companies, PG faces rising input costs for commodities, labor costs, and also potential disruptions in global supply chains. These factors can squeeze profit margins and limit the ability to raise prices. Over the long term, like all other consumer staples companies, PG has to continuously grapple with changing consumer preferences, as demand for healthy and sustainable products continues to evolve.
All told, I think the positives overwhelm the negatives under current conditions. Thus, my verdict is that The Procter & Gamble Company presents a compelling BUY opportunity for investors seeking a combination of value, growth, financial strength, and income. In particular, the technical indicators suggest near-term momentum, with the stock price breaking out of a key resistance level recently. Furthermore, PG's dividend yield suggests a small discount (while the P/E ratio indicates a fair price). It is a textbook case of buying a wonderful business at a fair price (rather than a fair business at a wonderful price).
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