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Colgate Up More Than 10% YTD on Demand: Will It Move Higher?

Zacks Equity Research
·4 min read

As the war with the COVID-19 pandemic rages on, Colgate-Palmolive Company CL has been gaining from strong demand for some categories like liquid hand soap, dish liquid, bar soap and cleaners across all geographies. Also, strong volume growth and robust pricing act as key growth drivers. Driven by these, shares of this Zacks Rank #3 (Hold) company have gained 10.3% year to date, in line with the industry’s performance. Notably, the second quarter of 2020 marked the seventh consecutive quarter of sequential improvement in organic sales.

Further, the company has increased its focus on the online platform as more and more consumers are using online services for their essential needs, given the COVID-19 outbreak. This led to growth of more than 50% in the e-commerce business during the second quarter, backed by a solid online show in Hill’s and U.S. businesses. Encouragingly, it has been expanding the availability of its products through e-commerce offerings with the launch of Hill’s to home, which enables pet parents to purchase prescription diet products directly from their veterinarians with home delivery options.

Apart from these, it is focusing on the innovation strategy to attain growth in adjacent categories and product segments. The company is on track with the premiumization of its Oral Care portfolio through major innovation. Some notable innovation efforts include the re-launch of Colgate Total and Hill’s Science Diet as well as the continued expansion of the Naturals and Therapeutics divisions. These endeavors are likely to aid the top line in the near term.  

Moreover, Colgate remains poised on its expansion plans. As a result, it continues to expand in the Naturals toothpaste and prescription diet categories. In fact, the Naturals range is a key area of focus for the company in personal and home care categories. Also, management’s recent buyout of Hello Products LLC (a leading oral care brand in the United States that produces eco-friendly and organic products) to expand its already strong oral care portfolio is performing well. The brand’s products, which have a distinct position in the market, are extremely popular among young consumers and across the broader segment.

However, the company is grappling with higher SG&A expenses for a while now due to increased advertising investments and elevated logistics costs stemming from a spike in demand due to COVID-19. Moreover, its sales for second-quarter 2020 continued to be hurt by adverse currency rates. Also, unfavorable currency negatively impacted sales across all geographic regions in the quarter. Looking ahead, management continues to expect a mid-single-digit negative impact related to foreign exchange on net sales for 2020, based on current spot rates.

Wrapping Up

Despite the persistence of high costs and currency headwinds, we expect the solid demand, sturdy digital growth, increased focus on innovation and aggressive expansion plans to help this stock to maintain momentum and stay afloat amid the ongoing COVID-19 crisis.

In fact, a VGM Score of B and a long-term earnings growth rate of 5.9% raise optimism in the stock. Topping it, the Zacks Consensus Estimate for 2020 sales and earnings indicates an improvement of 1.8% and 4.6%, respectively, from the year-ago period.

3 Stocks to Watch

TreeHouse Foods THS currently has an expected long-term earnings growth rate of 7.7% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank  (Strong Buy) stocks here.

Helen of Troy Limited HELE currently has an expected long-term earnings growth rate of 6.7% and a Zacks Rank #2.

Mondelez International MDLZ has a long-term earnings growth rate of 6.7% and a Zacks Rank #2.

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