Procter & Gamble’s soft earnings report Wednesday morning motivated us to take decisive action and move on from our tiny remaining position. The reason is simple: There’s not much to really like in the results. And while we made this decision early in the morning , nothing we heard on the conference call made us regret our choice. We’re especially glad we cut the position size by a third Tuesday afternoon to protect against an earnings letdown. That brought its weighting in the portfolio down to less than 1%. We’ve been clear since the July Monthly Meeting that we’re looking to slim down our portfolio from 34 stocks. That raises the bar to stick around. P & G didn’t meet it. Nor did Dover last week, prompting us to downgrade that industrial conglomerate to a sell-into-strength 3 rating. As Jim Cramer said on Wednesday’s Morning Meeting, this was not a quarter in which there was some good and some bad. This was almost all bad. P & G’s Beauty segment — home to brands such as Pantene and Head & Shoulders — was the only category to deliver positive organic sales growth in the quarter. While new Procter CEO Shailesh Jejurikar may have a plan to drive growth, the reality is that geopolitical dynamics are putting pressure on earnings. And the latest set of facts around the Iran war suggest that may not change anytime soon. This complicates our stated rationale for owning P & G as a hedge against an economic slowdown and a rotation away from high-flying artificial intelligence winners. We initiated the position in mid-November and subsequentially bought more on a few occasions. Even if we see a slowing in the economy that causes P & G’s sales to hold up relatively better than companies selling more discretionary goods — say, like new sneakers and jeans — the higher oil prices resulting from the Iran war are putting pressure on the company’s input costs and bottom line. In the reported quarter, the spike in energy prices along with higher transportation and materials costs resulted in a 6-cent per share headwind to earnings. Looking ahead, as noted in our trade alert earlier Wednesday, the company estimates a roughly $1 billion after-tax headwind in fiscal 2027 due to these same factors. As a result, we think it makes sense to hold onto defensive companies that can both withstand a slowdown on the top line and carry less exposure to the volatility in energy on their bottom lines. This includes pharmaceutical and healthcare names like Eli Lilly, Johnson & Johnson and Cardinal Health. All three stocks are higher so far this week, while the S & P 500 is down about half a percent. Quarterly results P & G’s quarterly revenue of $21.2 billion missed consensus expectations of $21.38 billion, according to LSEG. Adjusted earnings per share of $1.43 was a two-cent beat. Organic sales declined 1% in North America, even as consumption and market share improved. Now, that sounds counter-intuitive. However, on the earnings call, CFO Andre Schulten said…
Read More: Here’s a closer look at our decision to change course on P&G