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 there was a “notable disconnect between sell-out and sell-in.” “Sell-in” is what PG sells to retailers, while “sell-out” is what retailers sell to customers. For a company like P & G, sell-in is essentially what it records as sales. While sell-out in the quarter was up 2%, sell-in was down 1% for the quarter. So, consumers were purchasing more P & G products, benefiting its market share versus competitors. However, the retailers didn’t order an equivalent number of new products from P & G. Effectively, the retailers were willing to draw down some of the inventory that they had amassed ahead of time. On this point, it’s important to keep in mind that Amazon’s Prime Day shopping event took place in late June this year (P & G’s fiscal fourth quarter), instead of in early July (P & G’s fiscal first quarter). It seems possible that some inventory builds might’ve taken place in the prior quarter, leading to less “sell-in” for P & G during the fourth quarter. Organic sales were down 1% in Europe as well, with a similar dynamic called out by Schulten. In Greater China, organic sales increased 4%, with Schulten calling out positive momentum into the current quarter. Here’s a look at the segment results: Beauty (Head & Shoulders, Herbal Essences, Pantene, and Rejoice) was up 4% — on a 3% increase in volume and 1% increase in price. Grooming (Braun, Gillette, and Venus) was up unchanged as a 1% decrease in volume was offset by a 1% increase in price. Health care (Crest and Oral-B, as well as Metamucil, Neurobion, Pepto Bismol, and Vicks) was down 1% as a 3% decrease in price, and 1% unspecified headwind, were only partially offset by a 1% benefit from mix, and 2% benefit from price. Fabric & Home Care (Tide, Downy, and Gain, as well as Cascade, Dawn, and Swiffer) was unchanged. Baby, Feminine & Family Care (Luvs and Pampers, as well as Always and Tampax, as well as Bounty and Charmin) was down 2% on a 1% decline in both volume and price. (Jim Cramer’s Charitable Trust is long LLY, CAH, AMZN and JNJ. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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