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Inflation benefits - P&G Analysis

Updated: Mar 16, 2023


Inflation is the generalized increase in prices. It can be analyzed using a variety of indicators, including the Consumer Price Index (CPI). Although inflation is thought of as an event that damages most of a nation's economy - and most of the time this is true - there are some sectors that benefit from it. Let's see which ones:

  • Energy: The energy sector includes oil and gas exploration and production companies, fuel producers and companies that supply energy producers with equipment, materials and services. The energy sector is traditionally a good bet in the event of rising inflation, mainly because the demand for gas and electricity remains unchanged regardless of price. As a result, between 1973 and 2021, the energy sector recorded an average annual return of 9%. Energy stocks tend to perform well even in times of rising interest rates. However, it is important to note that large oil companies have high operating leverage, which helps them to ensure a high profit margin. In addition, geopolitical and logistical tensions can affect energy supply, driving up prices. This has helped make the energy sector one of the best performers during periods of higher inflation. Major US energy stocks include ExxonMobil and Chevron.

  • Real Estate: Real estate is popular with investors because it improves its value in the face of high inflation while providing increased rental income. However, real estate is vulnerable to rising interest rates, as the financial crisis of 2007-2008 demonstrated with rising house prices. It is important to note that when inflation is too high, the Federal Reserve Bank usually raises the interest rate to slow economic growth and contain inflation. There are several ways to invest in real estate. One can either buy the property directly, which involves a much higher cost, or invest in a real estate investment trust (REIT). REITs are companies that own and manage real estate for income. Listed REITs are available on the stock market. In particular, equity REITs have an excellent history of resisting inflationary pressures. Between 1973 and 2020, equity REITs outperformed inflation by 67%, with an average annual real return of 4.7%.Since equity REITs own real estate assets, they represent a decent hedge against inflation, as they benefit from increases in rents and property prices.

  • Consumer staples sector: this sector includes food, personal hygiene products, household items, cosmetics, etc. These are items that are bought even if they have higher prices. Generally, consumer goods companies do not offer the best earnings growth, as they are often large and mature companies. However, they offer limited price volatility, reliable dividends and good hedging in an inflationary environment. Costco Wholesale and Procter & Gamble are two good companies to watch. Although these sectors have historically performed well in the event of rising inflation, keep an eye on the others as well. Traditionally, value stocks generally perform better when inflation is high. On the other hand, growth stocks tend to benefit from low inflation.


Company description

The Procter & Gamble Company (P&G) is an American multinational consumer goods corporation headquartered in Cincinnati, Ohio. Since 1837 - when the American candlemaker William Procter and the Irish soapmaker James Gamble started P&G - it has specialized in a wide range of personal and consumer health, personal care and hygiene products. P&G’s major brand names include Head and Shoulders, Gillette, Braun, Pantene and many more. However, in 2014 P&G dropped around 100 of its brands to make a concentrated effort on the remaining 65, which produced 95% of the company’s profit. It has business presence across Asia-Pacific, Europe, the Middle East, Africa and the Americas. In 2020, P&G announced plans for its operators to be climate neutral by 2030 extending a previous goal to reduce emissions by half over the next 10 years.


During the last year, P&G stock has fallen 9%. Sales volumes were down in three of P&G's five core segments and were flat in the other two. The company achieved all of its organic growth, then, through raising prices. While that fact reflects P&G's pricing power, the company would prefer to expand sales through a balance of rising prices and improving sales volumes. Procter & Gamble generated a revenue of $80,187 billion dollars, a growth of 5.34% compared to the prior year. They also reported a net income of $14,742 billion, which represents a 3% increase.

Global background

Despite a very difficult operating environment due to COVID-19 pandemic, P&G delivered strong results that either met or exceeded its going-in target ranges for the fiscal year 2022: organic sales grew 7%, core earnings per share grew 3% and adjusted free cash flow productivity was 93%.


Accounting liquidity measures the ease with which an individual or company can meet their financial obligations with the liquid assets available to them - the ability to pay off debts as they come due. Liquidity can be calculated with three different ratios: current ratio, quick ratio and cash ratio.

Current ratio (Current assets / current liabilities)

2019 — 22.473.000 / 30.011.000 = 0,749

2020 — 27.987.000 / 32.976.000 = 0,849

2021 — 23.091.000 / 33.132.000 = 0,697

2022 — 21.653.000 / 33.081.000 = 0,654

A current ratio that is in line with the industry average or slightly higher is generally considered acceptable. A current ratio under 1.00 indicates that the company’s debts due in a year or less are greater than its assets - cash or other short-term assets expected to be converted to cash within a year or less. Calculating the current ratio at just one point in time could indicate that the company can’t cover all of this current debts, but it doesn’t necessarily mean that it won’t be able to when the payments are due.

Quick ratio (Cash + short term marketable investments + receivables) / current liabilities

2019 — (10.287.000 + 4.951.000) / 30.011.000 = 0,508

2020 — (16.181.000 + 4.178.000)/ 32.976.000 = 0,617

2021 — (10.288.000 + 4.725.000) / 33.132.000 = 0,453

2022 — (7.214.000 + 5.143.000) / 33.081.000 = 0,373

Specific current assets such as prepaid and inventory are excluded as those may not be as easily convertible to cash or may require substantial discounts to liquidate. The quick ratio measures a company’s capacity to pay its current liabilities without needing to sell its inventory or obtain additional financing. The higher the ratio result, the better a company’s

liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying debts.

Cash ratio Cash + Cash equivalents / current liabilities

2019 — 10.287.000 / 30.011.000 = 0,343

2020 — 16.181.000 / 32.976.000 = 0,490

2021 — 10.288.000 / 33.132.000 = 0,310

2022 — 7.214.000 / 33.081.000 = 0,218

If a company’s cash ratio is less than 1.00, there are more current liabilities than cash and cash equivalents. It means insufficient cash on hand exists to pay off short-term debt. This may not be bad if the company has conditions that skew its balance sheets such as long credit terms with its suppliers, efficiently-managed inventory and very little credit extended to its customers. As a matter of fact, P&G’s has.


Revenue can be defined as the amount of money a company receives from its customers in exchange for the sales of goods or services. P&G revenues have grown 18% in the last 4 years. The annual net income for 2020 was $13,027 Billion, a 235% increase. The reason is that the company wrote down the value of its Gillette brand by $8 billion. The one-time, noncash charge was to adjust the carrying values of Gillette’s goodwill and intangible assets. A non-cash charge is an accounting expense that does not involve a cash payment. Depreciation, amortization, stock-based compensation and asset impairments are common non-cash charges that reduce earnings, but not cash flows. With the increase in asset turnover, we can see that the company is using its own resources in a more efficient way. While the financial leverage is higher than 1 and means that the company has been financing its growth with debt. ROE has been growing quite rapidly, and ROI has been increasing at a 15% rate.

Multiple Analysis

Multiple analysis lets us understand the financial solidity of a company and allows us to make comparisons within the sector, taking into consideration other firms’ data, in order to deeply understand their financial situation.

Procter and Gamble's P/E ratio of 22,02 (stock price of 127,91$ and earning per share 5.81$) suggests that PG is a poor value at its current trading price as investors are paying more than what its worth in relation to the company's earnings. Investors are pessimistic on the American Consumer Staples industry, indicating that they anticipate long term growth rates will be lower than they have historically. The industry is trading at a PE ratio of 23.4 which is lower than its 3-year average PE of 28.9.

PG's trailing-12-month earnings per share (EPS) of 5.82 does not justify what it is currently trading at in the market. Trailing PE ratios, however, do not factor in a company's projected growth rate, resulting in some firms having high PE ratios due to high growth potentially enticing investors even if current earnings are low. Remaining on price-related multiples we should consider also P/CF, which divides the price per share by the operating cash flow per share, it is not useful to compare different companies because of the different legislation and amortization policies, but it’s useful to see if the company is solid enough to withstand future problems. In our case, Proctor and Gamble’s P/CF is 23,95, the ratio between 127,91$, PG price per share and 5,34$, its Free Cash Flow per Share.

After that we analyzed P/BV, which confronts the market capitalization with the book value, however it is quite easy for companies to adjust this value as a consequence of different accounting policies for every country. P&G’s P/VB is 6.959, higher than the average recorded this summer of 5.74. This means the company is a bit overvalued.

Moving on, we considered PEG ratio, which is similar to P/E ratio but it also takes into account also the earning’s expected growth, in this case Procter & Gamble Co's PEG Ratio for today is 2.43. However, a good PEG ratio has a value lower than 1.0. PEG ratios greater than 1.0 are generally considered unfavorable, suggesting a stock is overvalued. Meanwhile, PEG ratios lower than 1.0 are considered better, indicating a stock is relatively undervalued.

To conclude multiple valuation we go back to the last paragraph where we used EV/EBITDA which should be under 10 to consider a company undervalued. As of today, Procter & Gamble Co's enterprise value is $328,055 Mil. Procter & Gamble Co's EBITDA for the trailing twelve months (TTM) ended in Sep. 2022 was $21,169 Mil. Therefore, Procter & Gamble Co's EV-to-EBITDA for today is 15.50.

Piotroski score

Piotroski score is used to determine the best value stocks on a scale from zero being the worst to nine being the best. It is divided into 3 categories: profitability, leverage and liquidity, operating efficiency. For profitability we have a positive net income (+1), a positive ROA (+1), a positive CFO (+1), and the earnings quality, being the CFO higher than the net income is positive (+1). Moving on leverage and liquidity we have an increase in long term debt (+0), a lower current ratio than last year (+0), and no new shares (+1). Lastly, for operating efficiency we have almost the same gross margin, so for a prudent valuation we give 0 points, and a higher asset turnover ratio (+1). We end up with a score 6 out of 9, which is not an excellent value, but it is good enough to consider P&G when investing.


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