Procter & Gamble's Stock May Compound Earnings, According To JPMorgan

JPMorgan is advising investors to buy shares of Procter & Gamble now, according to a report released on Monday.

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Tide and Pampers' parent company Andrea Teixeira upgraded its rating from neutral to overweight. Additionally, she raised her price target for the stock by $5 to $155, which implies that the share price could rise by 10.8% from Thursday's closing price.

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Teixeira said investors should try to get ahead of what she sees as a likely inflection point in the fourth quarter of its fiscal 2023 as soon as possible. The stock can also regain its reputation as an earnings compounder if pressures ease, a term often used to describe businesses that are able to earn a good return on their capital commitments as a result of easing pressures.

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“As we previously viewed PG's brand equity, strong marketing capabilities, and supply chain excellence/resilience positively in the current operating environment, we are now thinking that the setup is more favorable for the company because consumers are still resilient, and when cost pressures subside in 2HCY23, we expect PG to become an earnings compounder,” Teixeira wrote in a note to clients.

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Moreover, she believes the initial outlook for fiscal 2024 will be a catalyst, especially since the company is likely to guide better per-share earnings with a stronger top line and stronger margins when pricing offsets the costs for the year.

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Shares of Procter & Gamble rose by 1.2% in Friday's premarket trading after Procter & Gamble was upgraded. After falling 7.4% in 2022, the stock is down 7.7% this year, meaning it is now underperforming the S&P 500 after outperforming it last year.

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Having been upgraded marks an undoing of last year's downgrade, at which point the stock underperformed its large-cap, multinational peers in the home and personal care products and beverages industries. The company, according to Teixeira, is better positioned for strong growth than it was in 2022 when it last performed well.

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It is true that the company - as well as its peers in the consumer staples sector - have a connection to bonds to which she alluded. Nonetheless, she believes that investors will be more interested in the relative resilience of the company's brands as well as the company's ability to compound earnings over time than any other factor.

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Due to the changing economic climate, consumers may be looking to trade down to cheaper brands as companies reinvest in brands to gain market share.

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“PG remains one of our high-quality names in our HPC coverage, and we believe that investors will gradually grow fond of its speed to market of innovation and superior execution as a result,” she said.