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Colgate (CL) Hits 52-Week High: What's Behind the Rally?

Zacks Equity Research

Colgate-Palmolive Company CL touched a 52-week high of $71.58, before closing the session a tad lower at $71.38 on Apr 29. Notably, the company’s accelerated investments in brands, higher pricing and strong innovation along with expansion in new markets and channels bode well. Further, the company is on track with its savings program.

Backed by these positives, Colgate delivered better-than-expected first-quarter 2019 results. The company’s both top and bottom lines surpassed the Zacks Consensus Estimate. Favorable pricing aided organic sales growth. Markedly, the stock has gained approximately 2% since the announcement of its quarterly results. (Read: Colgate Q1 Earnings & Sales Top Estimates)

In the past six months, shares of this Zacks Rank #3 (Hold) company have increased approximately 20%, outperforming the industry’s 16.6% growth.



Factors Narrating Colgate’s Growth Story

Innovation and in-store implementation have been the guiding principles for Colgate’s growth strategy over the years. The company’s innovation strategy is focused on growing in adjacent categories and product segments. In 2019, its innovation efforts will be marked by the re-launch of Colgate Total and Hill’s Science Diet as well as the continued expansion of the naturals range.

Notably, the initial response to the re-launch of Hill’s Science Diet has been positive, with improved market share in the first quarter. The company expects to continue the re-launch across the globe through the first half of 2020. Also, it continues to expand the Naturals toothpastes, based on local insights, with the launch of the charcoal range across many countries. In Latin America, the company’s Oral Care innovations bore fruit, with market share gains in Colgate Natural Extracts toothpaste line, Colgate Guard franchise in pharmacies in Brazil and the Colgate Slim Soft Advanced toothbrush. The Colgate Vedshakti line is witnessing market share gains in India.

In the first quarter of 2019, the company’s organic sales improved 3%, mainly driven by 1% increase in global unit volume and 2% rise in pricing. It delivered volume and pricing growth (on an organic basis) for the first time in over two years, with growth in all four categories, including Oral Care, Pet Nutrition, Personal Care and Home Care. Additionally, organic sales growth was led by toothpaste and Hill's businesses. This growth was broad-based, with 3% improvement witnessed in emerging and developed markets. Furthermore, pricing gains partly offset the decline in gross margin, reflecting a benefit of 70 basis points. In 2019, the company expects benefits of pricing and productivity programs to considerably offset rise in raw material costs, including the impact of transnational foreign exchange.

Apart from these, the company is aggressively expanding into faster growth channels while extending the geographic footprint of its brands. In 2019, it plans to expand the portfolio by introducing pharmacy brands like Elmex and Meridol to newer markets. It is also likely to increase investments in professional skin care businesses — Elta MD and PCA Skin — in spas and dermatologists. Further, it is expanding e-commerce offerings, with the launch of Hill’s to home, which significantly exceeded subscription targets in the first quarter. This platform will enable pet parents to purchase prescription diet products directly from their veterinarian, with home delivery option. All these actions are likely to drive solid top-line growth in 2019.

The company expects sales to be between flat and up in a low-single digit in 2019 on current spot rates. It estimates organic sales growth of 2-4% for 2019.

Also, the company remains on track with its savings programs, including the Global Growth and Efficiency Program or 2012 Restructuring Program and the Funding the Growth initiatives. In fact, the success of the Global Growth and Efficiency Program prompted its board to approve expansion and extension of the program through Dec 31, 2019. This, in turn, will enable Colgate to streamline its operations. It expects after-tax savings of $500-$575 million annually from the program.

Though management expects currency headwinds and higher input cost to remain hurdles in fiscal 2019, we expect the aforementioned endeavors to help sustain momentum.

3 Stocks to Watch

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