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Why Is Colgate-Palmolive (CL) Down 2.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Colgate-Palmolive (CL). Shares have lost about 2.7% in that time frame, outperforming the S&P 500.

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

Colgate Beats Q4 Sales Estimates, Earnings In Line

Colgate reported fourth-quarter 2019 results, wherein the bottom line was in line with the Zacks Consensus Estimate while sales surpassed the consensus mark. In the reported quarter, gains from strong volume growth and robust price increases were offset by unfavorable foreign currency. The company provided its earnings and sales guidance for 2020.

Adjusted earnings of 73 cents per share dipped 1.4% from the prior-year quarter and were in line with the Zacks Consensus Estimate. Including one-time items, earnings were 75 cents per share compared with 70 cents in the year-ago period.

Total net sales of $4,015 million rose 5.4% from the year-ago period and beat the Zacks Consensus Estimate of $3,942 million. The year-over-year improvement can be primarily attributed to 5.5% increase in global unit volume and 1.5% rise in pricing, somewhat offset by a negative currency impact of 1.5%. On an organic basis, the company’s sales improved 5%. This marked the fifth consecutive quarter of sequential improvement in organic sales growth.

Adjusted gross profit margin of 60.2% increased 80 basis points (bps) from the prior-year quarter, driven by cost savings under funding-the-growth program and higher pricing. This was somewhat offset by escalated raw and packaging material expenses.

In the reported quarter, adjusted operating profit of $938 million remained flat with the year-ago quarter. However, adjusted operating margin contracted 120 bps to 23.4%. Operating margin was mainly impacted by rise in adjusted selling, general & administrative expenses. Higher advertising investment caused rise in SG&A expenses and other cost, which was partially offset by increase in gross margin. Colgate’s market share of manual toothbrushes reached 41.1% at the end of 2019. Further, the company continued with its leadership position in the global toothpaste market, with market share at 31.6%.

Segmental Discussion

North America’s net sales (21% of total sales) improved 1.5%, reflecting 3.5% rise in unit volume offset by 2% decrease in pricing along with flat currency rates. On an organic basis, sales grew 1.5%.

Latin America’s net sales (23% of total sales) rose 2% year over year on unit volume growth of 3% and price increases of 3.5%, partly offset by negative currency impact of 4.5%. During the quarter under review, volume benefited from gains in Colombia and Mexico. On an organic basis, sales were up 6.5%.

Europe’s net sales (16% of total sales) increased 10% year over year on 13% rise in unit volume somewhat offset by 0.5% decline in pricing and 2.5% adverse impact of unfavorable currency exchange. Volume benefited from gains in France and the Nordic region, offset by a decline in Germany and United Kingdom. Further, organic sales in Europe increased 0.5% and organic unit volume grew 1%.

The Asia Pacific’s net sales (17% of total sales) improved 7%, attributable to 4.5% rise in unit volume, 2% pricing gains, and 0.5% positive impact of favorable currency rates. Volume growth stemmed from gains in the Philippines and Greater China. On an organic basis, sales for the Asia Pacific rose 6.5%.

Africa/Eurasia’s net sales (6% of total sales) grew 7.5% year over year, owing to 8% rise in unit volume, offset by 0.5% decrease in pricing while foreign exchange remained flat. Volume gains were driven by growth in Russia and South Africa. Organic sales for Africa/Eurasia improved 6% and organic unit volume improved 6.5%.

Hill’s Pet Nutrition’s net sales (17% of total sales) rose 8% from the year-ago quarter. Results gained from a 3.5% increase in unit volume and 5% rise in pricing, offset by a 0.5% negative impact of currency. Volume growth in the United States and Western Europe were partly negated by soft volume in Japan and South Africa. On an organic basis, sales were up 8.5%.

Other Financial Details

Colgate ended fourth-quarter 2019 with cash and cash equivalents of $883 million, and total debt of $7,847 million. Net cash provided by operating activities amounted to $3,133 million as of Dec 31, 2019.

Outlook

Colgate is on track to expand its oral care portfolio with the recent announcement of the agreement to buy Hello Products LLC, a leading oral care brand in the United States that produces eco-friendly and organic products. The company’s guidance includes this acquisition.

Going into 2020, the company expects top-line gain of 4-6% and organic sales growth of 3-5%, based on current spot rates. This growth indicates the company’s plan to continue to invest behind brands and global capabilities. Moreover, the company anticipates increase in gross margin in 2020, on both GAAP and adjusted basis. Further, it continues to expect higher advertising spending in 2020. On a GAAP basis, earnings per share for 2020 are likely to increase in a mid to high-single digit. Meanwhile, adjusted earnings per share are expected to rise in a low to mid-single digit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Colgate-Palmolive has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, 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 downward for the stock, and the magnitude of this revision indicates a downward shift. 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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