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Colgate-Palmolive (CL) Gains on High Demand Amid Cost Woes

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Zacks Equity Research
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Colgate-Palmolive Company CL has been gaining from strong demand for its products due to the COVID-19 pandemic. Further, solid online performance acts as a major growth driver. This led to top and bottom-line improvements in fourth-quarter 2020.

Moreover, the company’s commitment to pricing efforts through premiumization and revenue growth management has been paying off. This has resulted in organic sales growth and gross margin expansion. Notably, organic sales advanced 8.5% year over year in fourth-quarter 2020, marking the ninth consecutive quarter of sequential improvement in organic sales.

The company is witnessing positive trends in the e-commerce platform, led by growth in the Hill’s business. This led the e-commerce business to grow more than 50% in the fourth quarter of 2020, backed by a solid online show in Hill’s, China and U.S. businesses.

Encouragingly, the company remains on track to expand the availability of its products through the e-commerce channel. In sync with this, the launch of Hill’s to home enables pet parents to purchase prescription diet products directly from their veterinarian with the home delivery option.

Also, its professional skincare businesses — Elta MD and PCA Skin — in spas and dermatologists are performing well. As a result, the company expanded its premium skincare portfolio with the buyout of the Filorga skincare business.

Colgate remains focused on its innovation strategy to attain growth in adjacent categories and product segments. It is on track with the premiumization of its Oral Care portfolio through major innovation. Some notable innovation efforts include hum by Colgate, the Colgate Optic White Renewal toothpaste, and the Colgate Optic White Overnight Teeth Whitening Pen along with the continued expansion of the Naturals and Therapeutics divisions.

The company acquired Hello Products LLC (a leading oral care brand in the United States that produces eco-friendly and organic products) in a bid to expand its already strong oral care portfolio that is also performing well. These endeavors are likely to aid the top line in the near term.

Encouragingly, management predicts 2021 net sales growth of 4-7%, with a favorable currency impact. Organic sales are likely to rise 3-5%. Further, it expects gross margin expansion on both GAAP and adjusted basis, with an increase in advertising investments. Colgate anticipates GAAP earnings per share to increase in low to mid-single digits. Meanwhile, adjusted earnings per share are projected to grow in mid to high-single digits.

Despite such upsides, Colgate is not free from headwinds. The company has been witnessing elevated SG&A expenses due to higher advertising investments and logistics costs related to the increased demand stemming from the pandemic as well as investments related to product innovation and growth. Also, unfavorable foreign currency movements weighed on fourth-quarter sales.

Bottom Line

All said, we expect strong demand and online strength to continue supporting growth for Colgate, countering the cost-related headwinds. In the past six months, this Zacks Rank #3 (Hold) stock has gained 1% against the industry’s decline of 4.8%.

Moreover, a VGM Score of B and a long-term earnings growth rate of 6% raise optimism in the stock. Topping it, the Zacks Consensus Estimate for 2021 earnings is pegged at $3.30 per share, rising 0.3% in the past 30 days.

Stocks to Consider

Constellation Brands STZ currently has an expected long-term earnings growth rate of 7.4% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Diageo plc DEO has a long-term earnings growth rate of 8.3% and currently, a Zacks Rank #2.

The Estee Lauder Companies EL has a long-term earnings growth rate of 10.7% and currently, a Zacks Rank #2.

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