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Will Colgate (CL) Retain Earnings Trend in Q4 Despite Odds?

Zacks Equity Research

Colgate-Palmolive Company CL is scheduled to report fourth-quarter 2018 numbers on Jan 25, before the opening bell.

Colgate is popular among investors for its meet or beat earnings track record. The company posted in-line earnings in three out of the last four quarters, the average beat being 0.3%. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The question lingering in investors’ minds is whether this consumer goods giant will be able to deliver a positive earnings surprise in the fourth quarter of 2018. The Zacks Consensus Estimate for the quarter under review is pegged at 73 cents, which reflects a year-over-year decline of 2.7%. However, estimates remained unchanged in the last 30 days. The Zacks Consensus Estimate for revenues is pegged at $3.78 billion, down 2.8% from the year-ago quarter.

Colgate-Palmolive Company Price and EPS Surprise

 

Colgate-Palmolive Company Price and EPS Surprise | Colgate-Palmolive Company Quote

Factors at Play

Colgate is progressing well with the Global Growth and Efficiency Program, which focuses on reducing structural costs to improve profitability, standardizing processes to improve decision-making procedure and increasing market share worldwide. Meanwhile, Funding the Growth initiative mainly aims at opening environmentally sustainable distribution centers to offer better service besides reducing fuel and transportation costs. These programs are expected to contribute significantly toward the expansion of gross and operating margins in the long term. Further, the company is on track with brand building and productivity maximization initiatives.

However, Colgate has been losing ground due to dismal top-line trend and strained margins for quite a while now. Moreover, the company remains exposed to tough operating environment due to uncertain global markets and slowing category growth rates across some of its major markets. Raw material cost inflation, adverse foreign currency translations and stiff competition are other concerns.

Notably, Colgate lagged sales estimates in 21 of the last 22 quarters, with the fourth straight miss in third-quarter 2018. Unfavorable currency rates and soft unit volume growth mainly hurt the top line. Additionally, trade inventory reductions in China and volatility in Brazil, as well as soft category growth rates across various markets, were deterrents.

The company anticipates uncertain global markets and slowing category growth worldwide to pose challenges. Consequently, management continues to expect net sales decline in a low-single digit for the fourth quarter of 2018. Foreign exchange headwinds are also likely to hurt results. However, the company projects organic sales to increase in a low-single digit in the fourth quarter.

Despite gains from its savings program, Colgate has been witnessing strained margins for the past few quarters now, mainly due to higher raw material costs. Notably, the company reported gross margin contraction in the last four quarters while operating margin declined for six consecutive quarters.

Further, the company expects soft margins trend to continue in 2018. It anticipates lower gross margin, both on a GAAP and adjusted basis, in 2018. It also projects higher advertising investment in 2018, related to product innovations, core businesses and consumption-building initiatives, which should weigh on the operating margin.

Despite strained margins and a challenging backdrop, management expects a 3-4% improvement in adjusted earnings per share in 2018 compared with the last year. Moreover, it continues to anticipate a double-digit increase in GAAP earnings per share. It expects to continue delivering robust operating cash flows. This should help the company keep its meet or beat earnings track record intact in the fourth quarter.

Additionally, the Colgate stock has surged 7.9% in the past month, comfortably outperforming the industry’s growth of 4.7%. This indicates a positive sentiment on the stock ahead of the earnings release.

 



What the Zacks Model Unveils

Our proven model shows that Colgate is likely to beat earnings estimates this quarter. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Colgate currently has a Zacks Rank #3 (Hold) and an Earnings ESP of +1.02%, making us confident of an earnings beat in fourth-quarter 2018.

Other Stocks With Favorable Combination

Here are some other companies that you may want to consider as our model shows that these too have the right combination of elements to post an earnings beat:

Archer Daniels Midland Company ADM has an Earnings ESP of +2.45% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Procter & Gamble Company EL has an Earnings ESP of +0.66% and a Zacks Rank #2.

Church & Dwight Co. Inc. CHD has an Earnings ESP of +3.29% and a Zacks Rank #2.

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