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Colgate-Palmolive (CL) Up 10.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Colgate-Palmolive (CL). Shares have added about 10.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Colgate-Palmolive due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Colgate Q3 Earnings & Sales Beat, Gives Solid View

Colgate has reported third-quarter 2020 results, wherein earnings and sales beat the Zacks Consensus Estimate and improved year over year. Despite the impacts of the pandemic, the company witnessed accelerated growth in both top and bottom lines, driven by the continued demand for personal and home care products as well as the finest innovation across product categories. Moreover, it is witnessing positive trends in the e-commerce platform, led by growth in the Hill’s business. Notably, the company reported double-digit growth in operating profit, net income and earnings per share.

Adjusted earnings of 79 cents per share rose 11% from the prior-year quarter and surpassed the Zacks Consensus Estimate of 70 cents. On a GAAP basis, earnings were 81 cents per share, reflecting growth of 21% from 67 cents earned in the year-ago period.

Net sales of $4,153 million improved 5.5% from the year-ago period and beat the Zacks Consensus Estimate of $3,970 million. On an organic basis, the company’s sales advanced 7.5%. Organic sales were aided by improved volume and higher pricing. Unit volume increased 5% on a reported basis and 3% on an organic basis. Further, pricing was up 4.5%. Organic sales growth was mainly led by strength in the Africa/Eurasia, Latin America and Hill’s segments. However, results were partly hurt by a 4% negative impact of foreign currency.

Adjusted gross profit margin of 61.2% increased 220 basis points (bps) from the prior-year quarter. In dollar terms, adjusted gross profit rose 9.6% to $2,540 million.

Adjusted selling, general & administrative (SG&A) expenses increased 8.1% year over year to $1,521 million. As a percentage of sales, SG&A expenses escalated 90 bps to 36.6%. Adjusted operating income of $1,002 million in the third quarter advanced 11% year over year. Meanwhile, adjusted operating margin expanded 120 bps to 24.1%, driven by strong gross margin gains, slightly offset by higher SG&A expense rate.

Colgate’s market share of manual toothbrushes reached 31.1% year to date. Further, the company continued with its leadership position in the global toothpaste market, with the market share at 39.9%.

Segmental Discussion

North America’s net sales (22% of total sales) improved 6.5%, reflecting a 3% rise in unit volume and 3.5% pricing gains. On an organic basis, sales grew 5%, with organic volume up 1.5%, mainly driven by growth in the United States. Year to date, the company’s share in the toothpaste market is at 35% and in the manual toothbrush market, it is at 40.9% in the United States.

Latin America’s net sales (20% of total sales) dropped 5% year over year as 9.5% gains in pricing and 2% volume growth was more than offset by a 16.5% negative currency impact. On an organic basis, sales were up 11.5%, led by growth in Brazil, Argentina, Mexico and Colombia. Organic volume also grew 2% in the quarter.

Europe’s net sales (17% of total sales) increased 17% year over year on a 12% rise in unit volume and a 0.5% increase in pricing and a 4.5% gain from favorable currency exchange rates. Organic sales in Europe were up 3%, driven by a 2.5% increase in organic volume as well as growth in France, the Netherlands and Denmark. This was slightly offset by an organic sales decline in the U.K.

The Asia Pacific segment’s net sales (18% of total sales) improved 4.5% on both reported and organic basis. This growth is attributable to a 2.5% rise in unit volume (both reported and organic) and 2.5% pricing gains. Sales growth in the Asia Pacific was mainly led by Australia, India, the Philippines and the Greater China region.

Africa/Eurasia’s net sales (6% of total sales) increased 2.5% year over year, owing to a 6.5% increase each in unit volume and pricing, offset by a 10.5% adverse impact from foreign exchange. Organic sales for Africa/Eurasia improved 12%, driven by gains in Russia, South Africa and Turkey. Organic volume in the region was up 5.5%.

Hill’s Pet Nutrition’s net sales (17% of total sales) grew 11% from the year-ago quarter, both on a reported and organic basis. Results gained from a 6.5% increase in unit volume (both reported and organic) and 4.5% pricing growth. Sales were aided by gains in the United States, Europe, Australia and Canada.

Other Financial Details

Colgate ended third-quarter 2020 with cash and cash equivalents of $989 million, and total debt of $7,236 million. Net cash provided by operating activities amounted to $2,756 million as of Sep 30, 2020.

Outlook

Backed by favorable third-quarter results and expectations of positive trends for the rest of 2020, Colgate outlined its guidance for 2020. It predicts both net sales and organic sales to increase in mid-single digits, with organic sales expected to increase at the high-end of the predicted range. It expects gross margin expansion on both GAAP and adjusted basis, with an increase in advertising investments. Additionally, the company anticipates GAAP earnings per share to increase in double-digits. Meanwhile, adjusted earnings per share are expected to grow 6-7%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month.

VGM Scores

At this time, Colgate-Palmolive has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Colgate-Palmolive has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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