Procter & Gamble’s pricing power is stronger than ever

In addition to causing dire health consequences, the coronavirus pandemic is scouring supply chains around the world. On the other hand, consumer demand has resisted and focused on fewer goods and services available.

So, as usual, lower supply and higher demand led to higher inflation. To combat these additional costs, Procter & Gamble (PG 0.06%) and many other companies have raised the prices of their products. Fortunately for P&G shareholders, consumers aren’t averse to increases.

Image source: Getty Images.

P&G raises 2022 sales outlook

When Procter & Gamble released its third-quarter fiscal 2022 results on April 20, it told investors that inflationary pressure would cost the company $3.2 billion in its fiscal 2022. The figure represented an increase $400 million from the estimate it gave investors in January. Such is the magnitude and speed of inflation sweeping through economies around the world.

Despite these increases, P&G reiterated its earnings per share target for 2022. The company is offsetting these higher costs by passing them on to consumers. As a result, it raised its forecast for annual sales growth from a midpoint of 3.5% to a midpoint of 4.5%.

PG revenue table (quarter-over-year growth)

PG Revenue Data (Quarterly YoY Growth) by YCharts

In its most recent quarter, which ended March 31, P&G reported sales growth of 7%. The increase is mainly attributable to the higher prices that consumers pay for its products. Procter & Gamble has implemented price increases in all of its categories. Management was pleasantly surprised at how accepting customers were of recent hikes.

At an investor conference on May 20, Procter & Gamble Chief Financial Officer Andre Schulten said:

We know the prices we’ve taken and we know the elasticities we’re seeing in the market are better than we expected based on historical data. This continues to maintain a better price elasticity in the United States of around 20-30%. I spent a week with our CEO in Europe a few weeks ago, and this is also the case in Europe.

Price elasticity refers to the idea that consumers buy fewer units when the unit price increases. So maybe customers are buying fewer units than they otherwise would if P&G didn’t raise prices, but this drop in units purchased is more minor than at other times when P&G has raised prices. price. In other words, Procter & Gamble’s pricing power is stronger than ever.

What this could mean for investors

Procter & Gamble’s strong performance in a volatile macro environment could partly explain why its stock is becoming more expensive when measured by its price multiple to free cash flow. However, it has fallen slightly from its recent highs. Another explanation could be that investors are flocking to consumer staples after turning away from unprofitable growth stocks.

Table of PG PE ratios

PG PE Ratio Data by YCharts

Either way, P&G won the valuation hike. Its solid execution and demonstrated pricing power are the desired characteristics of an investment in the current economic scenario.

The company has indicated that it expects further price increases, and it’s unclear whether consumer response will be similar. If P&G shares tumble amid the selloff, investors might consider adding them to their portfolios.

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