Procter & Gamble is still firing on all cylinders, but it may not last


One of the attractions of owning shares in a company like Procter & Gamble (PG -2.30%) is that he sells things that people buy regularly. While this consistency makes the business resilient, it is not immune to the normal ups and downs of the business cycle.

However, right now it looks like Procter & Gamble is doing so well that people might start to believe it can avoid the next downturn. Here’s a look at what’s going well and why it probably won’t last forever.

Image source: Getty Images.

An incredible series of results

In the first quarter of fiscal 2022 (July to September 2021), consumer staples giant Procter & Gamble was able to increase organic sales by 4% thanks to a mix of price increases (two points percentage point), increase in volume (one percentage point), and shift of consumers to higher margin products (one percentage point). That’s pretty much the best of all worlds and it’s a feat the company repeated in the second fiscal quarter (October-December 2021), with organic growth up 6%, this time largely driven by higher prices and increased volume.

But that wasn’t the end of the streak, as the third quarter of fiscal 2022 (January through March) saw organic sales increase by 10%. That amount of time accounted for three percentage points, consumers switching to more expensive items added two percentage points, and the remaining five percentage points came from price increases.

The only reasonable reaction to this string of successful quarters is, well — wow! P&G is, without a doubt, firing on all cylinders right now.

What is truly remarkable, however, is that it was able to do so in the face of rapidly rising inflation. Essentially, even though consumers are faced with a significant increase in costs, they are still willing to pay more for P&G products, while increasing their consumption of these products. The company is generally at the high end of the industry in terms of cost, with products that try to differentiate themselves by offering noticeable quality improvements over those of the competition. So maybe that’s part of the reason for the incredible performance. And yet, trees do not grow to the sky.

Prepare investors for the inevitable

What’s interesting here is that the company is also set to end fiscal 2022 (in June) on a high note, wrapping up a great year. That’s because the price increases he initiated will continue to benefit earnings, and so far consumers haven’t batted an eye. In the industry, they call this price elasticity, or basically consumers’ willingness to accept price increases. According to Procter & Gamble management, price elasticity was, overall, better than expected.

Still, management is clear that it is closely monitoring the impact of its price increases. And it’s not just about pushing through price increases willy-nilly – it’s about being more surgical, often pairing price increases with product improvements. The goal here is to justify the price change. What P&G is doing obviously works — all the brands, low-cost and high-cost, are raising their prices. Ultimately, the company does not operate in a vacuum and there is some leeway when everyone raises prices.

But management repeatedly noted on its quarterly conference call that it is watching elasticities closely. Furthermore, he pointed out that the company does not need to make price adjustments all at once or quickly, although it intends to improve its margins over time. Essentially, the clear warning to shareholders is that when P&G begins to see consumer buying trends weaken, it may sacrifice margins to protect market share. Or, to put it more directly, he will stop raising prices if people are unwilling to pay more for his products. It’s not a question of “if” because eventually consumers will start to balk at higher prices and P&G will have to adapt.

it’s going well so far

Procter & Gamble clearly has the right strategy for today’s market, proven by its incredibly strong sales results. Long-term investors, however, should remember that the world goes through cycles. Indeed, not so long ago, P&G was floundering, seemingly unable to do anything right. There have been significant changes since that time, but today’s good times won’t last forever more than the bad times. And since management is already waiting for the turn, you also need to prepare for it – when, not if, it comes.