At these prices, Procter is a gamble

P&G pleased investors with strong coronavirus-enhanced results, but its valuation holds up only if consumer changes prove permanent

Procter & Gamble PG +0.63% reported strong results Tuesday as the pandemic continued to boost sales of consumer staples, but its shares are priced for the boom to never end.

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PGPROCTER & GAMBLE COMPANY
$138.87
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The company on Tuesday unveiled sales and earnings that were well ahead of analyst expectations for the quarter through September. Organic sales—which strip out the effects of currency fluctuations and acquisitions—rose 9% from a year earlier, compared with 6% growth in the previous quarter.

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As with U.K.-based Lysol maker Reckitt Benckiser —which reported results earlier Tuesday— P&G PG 0.59% continues to benefit from coronavirus-driven behavioral changes. Sales were robust across the board, but especially so in the fabric and home-care segment with 14% organic growth. This division includes brands such as Tide, Cascade, Swiffer and Mr. Clean.

P&G PG 0.59% is moving to take further advantage of the trend, having already launched a new hand sanitizer under its professional brand Safegaurd and the new Microban 24 line of surface cleansers. At the same time, categories that one might think would suffer in the stay-at-home economy such as Gillette are still doing fine: The grooming segment grew organic sales by 6% in the quarter.

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On a conference call with analysts, Chief Financial Officer Jon Moeller predicted that some household behavioral shifts will prove permanent. “We do expect that there is some stickiness to new habits that are being formed and new awareness that is being raised,” he said. Drawing an analogy to the behavior of consumers that lived through the Great Depression, Mr. Moeller argued that even the level of inventory that households keep for things such as Bounty paper towels might be permanently higher.

Perhaps so. But P&G shares are already priced as if millennials will go on living like an immunocompromised Greatest Generation. Having risen 14% so far this year, P&G is now trading at 25.7 times forward earnings, well above its 10-year average of 19.3 times and the highest multiple since the late 1990s, according to FactSet.

At those prices, it will be hard for investors to clean up.

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