A few years back, the mainstream news was packed with the absurdity of a new game being played by adolescents called the “Tide Pod Challenge.”
This “game” involved kids eating the Tide laundry detergent pods, despite the fact that eating them was poisonous, dangerous and even lethal. Moreover, they filmed themselves doing it. Aww, such is the nature of wannabe celebrity culture.
Of course, the kids who were playing the game knew that it was dangerous, but that was the whole point. You see, the adolescent brain can be a source of glorious wonderment or downright stupid exploration. In the Tide pod case, it was clearly the case of the latter.
But why, do you ask, am I bringing up the subject of the Tide Pod Challenge today?
The reason why is because Tide is one of the many brands made by consumer staples giant Procter & Gamble (NYSE: PG).
Now, PG is a core holding in my Intelligence Report newsletter advisory service, and on Tuesday, the company reported a telling, and very significant, fiscal Q1 earnings report.
Here is what we told subscribers to the “Eagle Eye Opener” morning briefing about the significance of the PG earnings release, and what it portends for the rest of this all-important earnings season.
Of all the earnings reports yesterday (and probably this week), the Procter & Gamble earnings results are perhaps the most useful, and they offer some cautious optimism on margins and earnings. Here’s why:
PG reported much stronger-than-expected headwinds from commodity prices and supply chain disruptions. In July, PG estimated that higher commodity prices and supply chain issues would result in a cost increase of $1.9 billion. But in just three months, PG revised those costs sharply higher, estimating that higher commodity prices would result in a $2.1 billion increase in costs, while transportation and freight accounted for an additional $200 million dollar increase in costs. This totals $2.3 billion, or more than 20% higher than the July estimate!
Yet, despite those substantial increases, PG was able to maintain the July guidance and still expected earnings to rise between 3% and 6% next year, with revenue growing 2-4% next year. And they will do that via supply chain management, improved efficiency (meaning cost cutting) and, most importantly, price increases.
We think that there are two notable takeaways from the PG report. First, inflation isn’t going away anytime soon. The fact that the maker of such staples as Tide is passing on these elevated costs means that higher consumer inflation will be with us for the foreseeable future, and while that doesn’t mean that inflation will stay at the current 4-5%, it does make it much more likely it will settle closer to 3% than the previous 2%.
Second, we can be cautiously optimistic that while rising costs are very real, U.S. corporate management has the tools to handle it (for now). Point being, PG was one of the firms most susceptible to supply chain issues and commodity costs increases, and the fact it held its guidance is encouraging for similar companies. However, it’s still far too early to declare earnings season a success (although this is a good indication).
From a market standpoint, this reinforces what we already know, i.e., the general direction of stocks over the medium term is still higher. Tactically, we want to stay long inflation-linked assets, because inflation is going to stay buoyant, and yields will likely continue to rise. So, we remain interested in banks, commodities, natural resource stocks, consumer discretionary, industrials, and value stocks more broadly.
Bottom line, it’s too early to say that markets are “in the clear” for this earnings season, but so far, the spike in costs is not translating into earnings reductions. If that can continue, it’ll remove a significant source of anxiety for investors.
The above analysis is the kind of look “under the market hood” that we provide in the “Eagle Eye Opener,” and we do it every single trading day at 8 a.m. Eastern.
If this is the kind of insight you’re looking for, and you should be, then I invite you to check out the “Eagle Eye Opener” daily market briefing right now.
A Thirst-Quenching Conversation
The Way of the Renaissance Man podcast is all about conversations with interesting people who have a true passion for what they do.
In the latest episode, I speak with just such a person, and she is Nermine Rubin, Founder & CEO of Water 4 Mercy.
Water 4 Mercy is a nonprofit organization with a mission to provide a “One-Two-Three Solution” to permanently end thirst, hunger and poverty in our world.
Through the use of innovative technologies and partners, and with a whole lot of love and passion, Water 4 Mercy provides clean water, agriculture and educational solutions to areas in Africa that need it most.
In this interview, you will see for yourself how passion, dedication and knowledge can be focused to solve a very serious problem. And in doing so, you’ll see how one person can spearhead a movement that makes the world a better place.
I really enjoyed this heartfelt conversation with Nermine Rubin, and I suspect you will too.
Our Adolescent Lens
“Adolescence is a time in which you experience everything more intensely.”
— Edward Zwick
No matter our age, I think we should often try to look at the world through our remembered adolescent lens (and no, this doesn’t mean eating Tide pods). By doing so, we can experience life with the raw intensity of youth. And while that can be both positive and negative, the point is we can connect with the power of life unfiltered by the tarnish of age. Just try it some time. After you do, I suspect you’ll thank me for the suggestion.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,