Can Procter & Gamble (PG) Spring A Surprise In Q3 Earnings?

The Procter & Gamble Company (NYSE:PG) is set to report third-quarter fiscal 2017 results on Apr 26, before the market opens. Last quarter, it posted a positive earnings surprise of 1.89%.

In fact, despite sales remaining subdued, the consumer goods company posted positive earnings surprises in the past four quarters, with the average being 4.98%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Though the company refrained from providing guidance for the third quarter, we expect moderate sales improvement through fiscal 2017. Negative Fx impact, moderate anticipated input cost inflation and continued geopolitical uncertainty may limit upside.

The company expects fiscal 2017 organic sales growth of around 2-3% compared with fiscal 2016. The company expects the combined foreign exchange headwind and minor brand divestitures to reduce sales by about 2–3% leaving overall almost flat sales guidance.

Procter & Gamble has been struggling to boost sales over the past few quarters. Significant negative Fx impact, weak volumes, divestures and slowing market growth have been impacting sales.

That said, after the company’s 1% modest growth in fiscal 2016, organic sales came in ahead of management's expectations in each of the first two quarters of this year, growing 3% in fiscal first quarter and 2% in the second quarter, buoyed by good mix of volume growth and higher pricing. Hence, this trend can be expected in the to-be-reported quarter as well.

Meanwhile, in order to counter tepid sales growth, Procter & Gamble is working hard on its cost saving initiatives to lower cost, reduce inventory and improve customer service levels by closing down underperforming plants, setting up new multi-category facilities, localizing manufacturing, upgrading, automating and standardizing operations and employing smart automation and digitization.

The company is also in the process of improving its marketing returns through optimized mix of advertising media (more digital, mobile and social presence), greater clarity of communication along with messaging and greater efficiency in non-advertisement marketing expenditure.

Productivity improvement and aggressive cost saving have consistently improved margins. Core gross margin was up 70 basis points in the preceding quarter with the trend expected to continue in the upcoming quarters.

It is to be noted that Procter & Gamble is considered a darling by dividend investors having an uninterrupted 61-year-long streak of dividend growth. The stock currently boasts a dividend yield of 3.11%.

For the fiscal third quarter, the Zacks Consensus Estimate for earnings is pegged at 94 cents, reflecting an increase of 8.8% year over year. Meanwhile, the consensus estimate for revenues is pegged at $15.68 billion, implying a 0.5% decline.

Earnings Whispers

Our proven model does not conclusively show that Procter & Gamble is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. However, that is not the case here as you will see below:

Zacks ESP: Procter & Gamble’s Earnings ESP is 0.00% as the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 94 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Procter & Gamble’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident about an earnings surprise.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into an earnings announcement, especially when the company is witnessing negative estimate revisions.

Stocks to Consider

Here are a few companies in the consumer staples that, according to our model, have the right combination of elements to post an earnings beat this quarter:

The Coca-Cola Company (NYSE:KO) has an Earnings ESP of +2.27% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

It is slated to release quarterly results on Apr 25.

Pinnacle Foods, Inc. (NYSE:PF) has an Earnings ESP of +2.17% and a Zacks Rank #2. The company is slated to release quarterly results on Apr 27.

PepsiCo, Inc. (NYSE:PEP) has an Earnings ESP of +1.10% and a Zacks Rank #3. PepsiCo is slated to release quarterly results on Apr 26.

Procter & Gamble Company (The) Price and EPS Surprise

Procter & Gamble Company (The) Price and EPS Surprise | Procter & Gamble Company (The) Quote

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