Event: Procter & Gamble (PG) report fiscal Q4 results tomorrow before the opening bell. The options market is implying about a 2.5% one day post earnings move vs its 4 quarter one day average move of about 3%, and in line with the 1o year average.
Price Action / Technicals: Shares of PG are attempting to breakout above what was technical support (and then resistance) from then all time highs in early 2015. The decline from those highs and inability to hold that support resulted in a peak to trough decline of a bit more than 30% to its August 2015 lows. The stock has now recovered to the tune of 30% with mild out-performance in 2016 (up nearly 8% to the S&P 500 up 6.5%). I could easily be eyeing a gap fill towards $90 on a beat and raise:[caption id="attachment_65408" align="aligncenter" width="600"] PG 2yr chart from Bloomberg[/caption]
Valuation / Cash Return: PG’s more than 50% revenue exposure outside the U.S. has made its earnings volatile since the end of QE in Q4 2014, which happens to be the year its earnings have peaked, with two consecutive annual earnings decline and sales expected to be $65 billion in fiscal 2016, down from their 2013 peak of $84 billion. PG trades at about 21.5x expected fiscal 2017 eps growth of about 9%, vs the forward PE of the SPX of 16.4x.
PG paid out nearly 67 cents a share in dividends in the quarter, vs its expected eps of 74 cents (current annual div yield 3.1%), combined with what is likely to at least $2 billion in shares repurchased and you have a stock in this yield environment that looks downright attractive, no matter what the U.S. dollar is doing. Investors have flocked to consumer staples like PG for the high levels of cash return, for yield and eps management, but also the defensive nature of their products that should be less susceptible to consumer whims in difficult spending environments.
My View into the Print: While the case for a breakout could easily be made on a technical standpoint, and it will most certainly happen if PG is able to guide up for the full fiscal year 2017, I think that is unlikely given the volatility of the US dollar, and the continued softness in the global economy. Following PG’s fiscal Q3 earnings in late April, management highlighted the impact of FX first a headwind, and then a tailwind in PG’s fQ3 earnings presentation:
FY 2016 Guidance
Potential Headwinds Not Included in Guidance
• Further foreign currency weakness
• Change in market growth rates
• Further unrest in the Middle East, Russia & the Ukraine
• Further deterioration in markets like Argentina and Brazil – with softened market conditions
FY 2016 Guidance
Potential Tailwinds Not Included in Guidance
• Strengthening of foreign currencies
• Expansion of markets
• U.S. economic growth accelerates
The U.S. dollar index (DXY) is up a little less than 2% since that guidance, after the shellacking the dollar took late last week following the disappointing Q2 gdp print.
Despite Wall Street analysts being fairly mixed on the stock with 13 Buy ratings, 11 Holds and 3 Sells, with an average 12 month price target of $86 (just near where the stock is trading), the stock appears to be a bit crowded due to its yield and defensive nature. A meaningful guide down to fiscal 2017 and I suspect you have a stock closer to $80 in the next couple weeks.
Short dated options prices are reasonable with at the money weeklies sporting implied volatility of about 23.5%, 30 day at-the-money is around 15%, which could set up nicely for those with a directional view:[caption id="attachment_65410" align="aligncenter" width="600"] From Bloomberg[/caption]
We will follow up with a couple ideas that look to sell the weeklies to finance owning longer dated options.