Procter & Gamble stock forms a risky pattern ahead of earnings

Procter & Gamble (PG) stock price has done well in the past few decades, as the company has positioned itself as the ultimate dividend king. 

It has boosted its dividends for 67 years, while its stock has survived major events like the First and Second World Wars, the Cold War, The Great Depression, the Global Financial Crisis (GFC), and the Covid-19 pandemic. 

Its stock has more than doubled in the last decade, pushing its market capitalization to over $400 billion. It has also continued to outperform some of its closest competitors like Colgate-Palmolive, Unilever, Kimberly-Clark, and Churchill and Dwight, as shown below.

Global diversified brand

Procter & Gamble is one of the most popular brands, whose products are used by millions of people each day. 

It owns some of the most recognizable brands globally like Pampers, Always, Ariel, Downy, Gillette, and Olay.

It is a highly diversified company that focuses on five key areas like beauty, grooming, health care, fabric & home care, and baby, feminine, and family care.

Fabric and home care is its biggest business, accounting for 36% of net sales, followed by baby, feminine, and family care, health care, and beauty.

P&G’s business has been doing well, helped by the growing population and middle class in most countries. A rising population means more people spending on more products like Always and Pampers.

The challenge, however, is that its business is highly competitive, with companies like Unilever, Kimberly Clark, and Churchill and Dwight fighting for market share. Most importantly, it is competing with newer, and often cheaper brands from countries like India and China.

The other challenge is that e-commerce has changed the fast-moving consumer goods (FMCG) industry. Unlike in the past when shelving space was everything, today, any company can sell on websites like Amazon.

Still, P&G and other big brands have two main advantages. First, they are well-known brands that have existed for generations. Second, P&G has the financial resources to outspend smaller companies in Amazon advertising. Third, it also benefits from shelve space in places like Walmart and Target.

As a result, its annual revenue has grown steadily in the last decade, moving from $74 billion in 2014 to $82 billion last year. Its annual profits have also continued rising.

Read more: Cramer: buy P&G as it is ‘so much better than it used to be’

P&G earnings ahead

The next important catalyst for Procter & Gamble will be its upcoming financial results scheduled for October 18th. 

These results will provide more color on its business. The most recent results showed that its volume in the beauty and baby, feminine, and family care business declined by 1% in the last quarter.

Volume in the other three segments rose by 2%. The company has previously managed to offset its weaker volumes by hiking prices.

Its revenue was flat at $20.5 billion while its net earnings dropped by 7% to $3.14 billion. This happened as its operating margin dropped from 20.3% to 18.9% in the last quarter.

Analysts expect Procter & Gamble’s revenue will come in at $21.96 billion, an 11% increase from the same quarter last year. For the year, revenue is expected to grow by 2.50% to $86.14 billion.

Read more: Procter & Gamble (P&G) sees lackluster sales increase in latest earnings, but sweetens the deal with EPS

Valuation concerns remain

The biggest issue for Procter & Gamble is that its stock is highly overvalued considering that its growth has stalled. This premium is mostly because P&G is one of the few dividend kings in the US, having boosted its payouts in the last 50 years. 

P&G trades at 24 times earnings, which is slightly higher than the S&P 500 average of 21, and the sector median of 20. Its forward EV to EBITDA ratio of 17 is much higher than the sector median of 10.95.

P&G’s valuation means that if you bought the company for the current market cap, it will take you over 24 years to recover your funds. 

However, as we have seen with companies like Moody’s, Visa, and Mastercard, it is common for some blue-chip companies to be overvalued for a long time. P&G will therefore continue doing well as long as the company publishes modest results.

Procter & Gamble stock analysis

On the weekly chart, we see that the P&G share price has been in a strong bull run for a long time. It has remained above all moving averages, meaning that bulls are in control. 

The stock has, however, formed a rising wedge pattern, which is a popular bearish sign in the market. Also, the two lines of the MACD have made a bearish crossover pattern. The Relative Strength Index (RSI) has also formed an ascending channel, and is moving downwards.

Therefore, the stock will likely have a bearish breakout after publishing its financial results. If this happens, the stock could retreat to the next point at $160. However, a move above the year-to-date high of $177.80 will point to more gains.

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