Colgate (CL) Gains From Its Savings Plan: Time to Hold?

Colgate-Palmolive Company CL has been gaining on the recent progress of its savings program. Moreover, the company remains well poised with innovation, brand building and productivity maximization initiatives. However, strained margins remain a threat.

Let’s analyze the pros and cons of this Zacks Rank #3 (Hold) stock.

Robust Savings Plan: A Key Tool

Colgate remains optimistic about its Global Growth and Efficiency Program as well as Funding the Growth undertakings, which are delivering impressive results. Also, the company has extended its Global Growth and Efficiency Program through Dec 31, 2019. This will enable the company to take advantage of the incremental opportunities in the process of streamlining operations. Additionally, it expects after-tax savings from the program to increase to $500-$575 million compared with $425-$475 million projected earlier.

In fact, Colgate’s four-year Global Growth and Efficiency Program will help the company to improve gross and operating profit and enhance its market share position worldwide. By funding the growth initiative, the company intends to open new environmentally sustainable distribution centers to offer better service to its customers, besides reducing fuel and transportation costs. The aforementioned endeavors are expected to contribute significantly toward the improvement of gross and operating margins over the long term.

Innovation Aids Growth

Colgate has been undertaking innovation and in-store implementation, as a key component of its growth strategies, over many years. This has enabled the company to capture the market share across all regions and categories. On the innovation front, it is coming up with Naturals, an innovation to counter local toothpaste brands, particularly in Asia and Eurasia. Colgate has managed to tailor the Naturals offerings in each of its major markets as well.

Decent Earnings Trend & Bullish Outlook

Colgate has delivered in-line earnings for the third consecutive quarter in fourth-quarter 2017. In fact, this marked the company’s fifth in-line earnings in the last six quarters. Results can be attributed to solid sales and significant market share gains. Going forward, the company remains on track with the brand building and productivity maximization initiatives.

Following the results, Colgate provided a bullish outlook for 2018. The company now anticipates net sales to increase in the mid-single-digit range and organic sales growth of low to mid-single digit. Also, including benefits from the tax reform, GAAP earnings are envisioned to improve in the double-digits range while adjusted earnings are anticipated to be up nearly 10%.

Bottom Line

While all seems well with Colgate, it is currently plagued with strained margins for the past few quarters. In fourth-quarter 2017, the company faced increased raw material and packaging costs as well as higher advertising expenses, thus creating pressure on margins.

Looking ahead, the company expects adjusted gross margin to expand 50-70 bps in 2018. However, it also expects to incur higher advertising expenses, which is likely to weigh upon operating margins. In addition, Colgate anticipates the challenging backdrop to persist due to uncertain global markets and slowing category growth worldwide.

Consequently, shares of Colgate have lost 2.4% in the past three months, outperforming the industry’s decline of 6.8%.

Nevertheless, Colgate’s robust savings program, innovations, brand building and productivity maximization initiatives are likely to drive long-term growth.

Looking for More Promising Bets? Check These

Some better-ranked stocks in the same sector are The Clorox Company CLX, Conagra Brands Inc. CAG and Estee Lauder Companies EL, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Clorox has delivered an average positive earnings surprise of 2% for the trailing four quarters. Also, it has a long-term earnings growth rate of 8.6%.

Conagra Brands has pulled off an average positive earnings surprise is 6.2% for the trailing four quarters. The stock has a long-term earnings growth rate of 8%.

Estee Lauder delivered a positive average earnings surprise of 18.1%. The company has a long-term earnings growth rate of 12.9%.

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