Results for PG, JNJ and ABBV

Three positions in our portfolio experienced significant price changes this week after their results was announced: Procter & Gamble, Johnson and Johnson (JNJ) and AbbVie (ABBV). Let’s look at each of them.

The Procter & Gamble Company (PG) announced quarterly results on Tuesday, 23 January 2018. Revenues grew for their 2^nd fiscal quarter, earnings increased by about 10% year-to-year and beat market expectations. Still, the stock price took a hit. Monday’s close was USD 91.88 and the price dropped to USD 89.02 at close of market on Tuesday, a change of -3.11%. Why is the stock price down while earnings beat expectations? Does it matter? To answer the first question, we believe that expectation were too high. In particular the slow revenue growth of about 2% in the period is still perceived as underwhelming as it barely keeps up with inflation if that. Also, margins continue to be under pressure in particular in their razor blade business (Gilette) where they compete with offerings like Dollar Shave Club. The baby diaper business (Pampers) was subject to aggressive price cutting as well to keep market share. We believe that PG needs to continue keeping their costs under control to be able to further reduce prices where otherwise the price difference to competitors would become too big. As to the second question, does it matter? We believe that PG has demonstrated for a long time that it is able to continuously improve revenue and earnings. They have increased their dividends every year for 61 years. We believe 2018 will not be different. Therefore the one day drop on 23 January is likely to be only “noise in the signal” and the currently somewhat lower prices might be an opportunity to add shares. We are keeping in mind, though that the P/E ratio of 22.6 is still very ambitious. As a long-term investor we don’t see a reason at the moment to change our position.

On 23 January, Johnson & Johnson (JNJ) was another company that reported their quarterly results. Here, too, earnings estimates were beaten and the stock took a hit: from USD 148.14 to USD 141.86, or -4.24%. Revenues for the quarter were up by about 11.5% (year to year) and earnings per share (EPS) were up by 10.1% (year to year). For fiscal 2018 the guidance is for sales growth to be between 5.4% and 6.4% and EPS growth between 9.6% and 12.3%. It appears that during the earnings call it became clear that organic growth would only be 2.5% to 3.5% which means that the remainder would need to come from acquisitions. This was interpreted as negative and caused the fall in stock price. JNJ has increased their dividend for 55 years in a row and we believe it will continue to do so in 2018 as well. With an expected EPS growth of about 10% there should be enough wiggle room for that.

Then on 26 Jan, before market open, AbbVie INC (ABBV) reported quarterly results. It was yet another strong quarter beating estimates for EPS and revenue. Earnings grew by about 23% year over year while revenues increased by about 13%. For 2018 AbbVie expects their effective tax rate to be about 9% as they repatriate overseas earnings at a lower tax cost. This will make it even easier to increase dividends and buy back shares. As a result the guidance for EPS for 2018 was increased from USD 6.37 to USD 6.57 to USD 7.33 to USD 7.43. The markets seemed to like this news and the stock price increased by 13.67% on Friday, 26 Jan.

We remain positive on all three: PG, JNJ and ABBV. However, we highlighted the swings – minus 3.11%, minus 4.24%, plus 13.67% - to demonstrate that within just a week, prices can fluctuate wildly, even for more conservative shares. Increasing diversification and taking a long-term view are two factors that help mitigate wild swings.

Disclosure: We own shares in PG, JNJ and ABBV. We have no plans to change our position within the next 48 hours from publication.