Morning Note: Market news and updates from P&G and J&J.

Market News

US equity markets moved higher last night: S&P 500 (+0.3% to another record high), Nasdaq (+0.4%). Netflix rose 8% after market hours after posting its best quarter for new subscribers since early in the pandemic. Texas Instruments and 3M both fell heavily on disappointing results. The 10-year Treasury currently yields 4.09%.

This morning in Asia, the Hang Seng (+3.5%) and Shanghai Composite (+1.8%) both rose as China officials stepped up their rhetoric to lift market confidence and asked some funds to restrict shorting stock. In Japan, the yield on 10-year JGBs surged the most since December and Japan stocks fell 0.8% as BOJ rate hike bets gathered pace. The Nikkei Banks index rose by 4.2%.

The FTSE 100 is currently trading 0.6% higher at 7,535, while Sterling buys $1.2713 and €1.1696.

The oil price trades at $79.40 a barrel as US crude inventories fell by 6.67m barrels last week, while gasoline supplies increased, the API is said to have reported. The cost of shipping fuel to Asia from the Middle East has jumped 182% since 12 January. Gold ticked up to $2,031 an ounce.

Source: Bloomberg

Company News

Yesterday lunchtime, Proctor & Gamble released results for the three months to 31 December 2023, the second quarter of its financial year to 30 June 2024. The figures were better than expected and the group raised its full-year earnings guidance. The shares were up 5% in response.

P&G is a global consumer goods company with annual sales of $82bn across a broad range of iconic brands including Gillette, Crest, Ariel, Head & Shoulders, and Pampers. The group generates around half of its sales in North America, a fifth in Europe, and the remainder in emerging markets.

Net sales grew by 3% to $21.4bn, in line with the market forecast of $21.5bn. Organic growth, which excludes the impact of acquisitions, disposals, and negative currency movements, was up 4%. Growth was driven by a 4% increase in pricing, partially offset by a 1% decrease in organic shipment volumes. Mix had a neutral impact on sales for the quarter.

Growth was broad-based, with 8 of 10 product categories holding or growing organic sales. Global aggregate value share was 40 basis points up on the prior year, with 28 of the group’s top 50 category/country combinations holding or growing share.

The group operates across five divisions:

·       Fabric & Home Care (34% of sales) grew by 6% in organic terms in the quarter, driven by all categories.

·       Baby, Feminine & Family Care (25% of sales) grew by 3%, driven by strength in feminine care.

·       Beauty (18% of sales) grew 1%, with hair care growing high single digits.

·       Health Care (15% of sales) grew by 2%, despite a volume decline driven by respiratory products.

·       Grooming (8% of sales) grew by 9% with growth in all regions.

On a currency-neutral basis, the gross margin grew by 590 basis points to 53.4%, driven by higher pricing, favourable commodity costs, and gross productivity savings, offset partly by product reinvestments. The operating margin grew by 470bps to 27.7%. Core EPS grew by 18% at constant currency $1.84, well above the market forecast of $1.70.

During the quarter, adjusted free cash flow was $4.3bn and adjusted free cash flow productivity was 95%. The group ended the period with net debt of $25.8bn and returned $3.3bn of cash to shareholders through dividends ($2.3bn) and share repurchases ($1.0bn). The group has increased its dividend for 67 years in a row.

In December, the company announced a limited market portfolio restructuring of its business operations, primarily in certain Enterprise Markets, including Argentina and Nigeria, to address challenging macroeconomic and fiscal conditions. In connection with this announcement, the company expects to record incremental restructuring charges of $1.0bn-$1.5bn.

The company has maintained its guidance for organic revenue growth for the financial year to June 2024 at 4%-5%. However, guidance for EPS growth has been raised from 6%-9% to 8%-9%. The company continues to expect adjusted free cash flow productivity of 90% and expects to pay more than $9bn in dividends and to repurchase $5bn-$6bn of shares in the year.

Source: Bloomberg

Yesterday lunchtime, Johnson & Johnson released its Q4 results and reiterated its earnings guidance for 2024. In response, the shares were marked down 3% in US trading hours.

J&J is a global healthcare company with leading positions in pharmaceuticals and medical devices. The group has more than 20 products/platforms each with sales of more than $1bn. The group’s strategy is to grow sales faster than the market, and to grow earnings faster than sales. Given its broad spread of businesses, J&J is considered the bellwether of healthcare companies, providing a good read-across for a range of other stocks.

The company’s former Consumer Health unit has been spun off and now trades as a separate listed company (Kenvue). J&J still owns around 9% of the stock, a stake currently worth around $3.5bn.

For the full year, reported sales grew by 6.5% to $85.2bn. On an adjusted operational basis, which excludes the impact of acquisitions and disposals, growth was 5.9%. Operational growth excluding the impact of revenue from Covid-19 vaccine was 9.0%.

In the final quarter, reported sales grew by 7.3% to $21.4bn, a touch above the market forecast of $21.0bn. On an adjusted operational basis, sales grew by 5.7%, with US domestic sales (+8.8%) outpacing international sales (+2.1%). Operational growth excluding the impact of revenue from Covid-19 vaccine was 10.9%.

The group’s performance demonstrates continued strength and resilience across both of its businesses. Innovative Medicine (i.e., Pharmaceuticals, 64% of sales) grew by 4.9% during the year, or 7.2% excluding Covid-19 vaccine. Growth was driven by a broad range of products, particularly its blockbuster psoriasis treatment Stelara. MedTech (i.e., medical devices, 36% of sales) increased by 7.8%, driven primarily by electrophysiology products in Interventional Solutions, contact lenses in Vision, wound closure products in General Surgery, and biosurgery in Advanced Surgery.

The gross margin remained very high at 68.8%, albeit down from 69.3% last year. Full year adjusted EPS grew 11.1% to $9.92, with Q4 up 11.7% to $2.29, in line with the consensus forecast.

J&J has a very strong balance sheet and ended the year with net debt of $6bn on the back of free cash flow generation of c. $18bn. The group has consistently invested in organic growth – R&D spend was $15bn in the year – and, as a result, around 25% of sales come from products launched in the last five years. J&J has completed its share buyback programme and increased its dividend by 5.3% to $4.76 per share, equating to a 3% yield.

The company also said it had reached a tentative settlement to resolve probes by US states into whether it misled consumers about the safety of its talc products, which thousands of lawsuits claim can cause cancer. The $700m settlement does not extend to private plaintiffs’ cases against the company, some of which are expected to go to trial later this year.

The group re-confirmed its guidance for 2024: adjusted operational sales growth of 5.0%-6.0% to $88.2bn-$89.0bn and adjusted operational EPS growth of 6.4%-8.4% to $10.55-$10.75. In the Innovative Medicine division, the group expects slightly stronger sales in the first half and continued uptake from recently launched products. In MedTech, the group expects procedure volumes to remain above pre-covid levels and an ongoing impact from value-based pricing.

Source: Bloomberg