Is Procter & Gamble a Buy After Its Latest Earnings Report?

Procter & Gamble (NYSE:PG) gave investors something to celebrate with its latest earnings report. Shares of the consumer household products giant jumped more than 5% after it delivered stronger-than-expected sales growth.

However, while demand for its products is improving, earnings growth remains sluggish. That raises an important question for investors: Is P&G's recovery gaining enough momentum to justify buying the stock after its recent earnings-driven rally?

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P&G is showing encouraging signs of a turnaround

P&G's organic sales grew 4% in its fiscal 2027 first quarter. That's a notable improvement from the fourth quarter of its 2026 fiscal year when organic sales only grew 1%. The primary growth drivers were volume (2.4%) and mix (1.1%), not price increases (0.4%). That's an important distinction because it shows that demand for its products is largely improving.

Fabric and home care delivered the strongest volume growth at 4.3%, followed by baby, feminine, and family care at 2.3% and beauty at 2.2%, offsetting declines in healthcare (-2.9%) and grooming (-0.4%). The company noted that innovation-based pricing in certain markets helped drive volume growth. It also benefited from a more favorable premium product mix.

Despite the strong start to its fiscal year, P&G didn't change its full-year organic sales guidance, which it still expects will be between 1% and 3%. That suggests the company isn't yet fully confident that it's seeing a sustained recovery.

Higher costs are weighing on earnings

While its organic sales growth rate accelerated, its margins remain under pressure. P&G's core adjusted earnings per share (EPS) only increased 1% to $2.00. While that is better than the 3% decline in core EPS it reported in the fourth quarter, it's far below its long-term target of delivering mid-to-high single-digit core EPS growth. The company is battling cost pressures, including higher commodity costs and the impact of tariffs.

P&G expects these headwinds will continue to impact its results this year. That's driving its rather tepid outlook of 0% to 3% adjusted EPS growth ($6.89-$7.11). The company noted that higher commodity costs, interest expenses, and other headwinds will impact EPS by $0.79 this year, or an 11% drag. So, while the company's growth strategy is starting to drive volume improvement, continued margin pressures will weigh on EPS.

Is P&G stock attractively valued?

All that brings us back to the central question: is P&G a buy after its mixed earnings report?

With the recent spike in the share price, P&G currently trades at around $165 a share. With the company reaffirming its full-year adjusted EPS outlook at $7.00 (at the midpoint), it trades at about 23.5 times forward earnings. That's not as cheap as it was earlier this year when it traded at less than 21 times forward earnings. However, its valuation is still well off its peak of more than 26x in late 2024. The recent move higher has also lowered P&G's dividend yield from around 3% to 2.7%.

Investors are paying a premium because P&G owns a laundry list of durable consumer brands like Tide, Mr. Clean, and Pampers. It also generates very resilient cash flows. During the first fiscal quarter, the company generated $5.8 billion in operating cash flow and $4.4 billion in free cash flow. That supported continued strong shareholder cash returns ($2.6 billion of dividend payments and $1.3 billion of share repurchases). The company expects to return over $15 billion to shareholders this year (more than $10 billion in dividends and $5 billion in share repurchases).

The issue is that P&G now requires its earnings growth to accelerate and its valuation multiple to expand further to deliver a compelling total return from here. For example, it would need to grow its earnings per share at a 5% to 6% compound annual rate, and its valuation multiple would need to expand to 25x-26x to generate a 10% annualized total return over the next five years, including its dividend. That's certainly possible, as P&G has traded at a premium valuation in the past and aims to deliver that growth rate again. However, the margin of safety is razor-thin after its post-earnings pop.

Is Procter & Gamble a buy?

P&G remains a high-quality defensive dividend stock. However, it's not as attractive an investment as it was before its post-earnings pop. It could still deliver a solid total return over the next five years if it can execute its turnaround. The risk is that it can't return to mid-single-digit EPS growth. That would cause the company to lose some of its valuation premium, resulting in lackluster returns. I think it's better to wait for a more favorable entry point than to buy P&G after earnings.

Matt DiLallo has positions in Procter & Gamble. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.