Colgate-Palmolive (CL) Down 6.2% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Colgate-Palmolive Company CL. Shares have lost about 6.2% in that time frame.

Will the recent negative trend continue leading up to its next earnings release, or is CL due for a breakout? 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 Beats on Q1 Earnings, Sales Miss

Colgate-Palmolive Co. posted adjusted earnings of 74 cents a share in first-quarter 2018, up 10.4% from the prior-year quarter. The figure surpassed the Zacks Consensus Estimate of 73 cents. Including one-time items, earnings were 72 cents a share compared with 64 cents reported in the year-ago period.

Total sales of $4,002 million improved 6.5% from the year-ago period but lagged the Zacks Consensus Estimate of $4,018 million. The top line gained from 2% increase in global unit volumes and 4.5% favorable currency impact while the pricing remained flat. During the reported quarter, unit-volume growth included a 0.5% contribution from recently-acquired professional skin care businesses. However, the sales lag can be attributed to soft category growth across many markets.

On an organic basis (excluding foreign exchange, acquisitions and divestitures), the company’s sales advanced 1.5%, which was below expectations. Lower organic sales resulted from flat unit-volume growth in emerging markets. However, unit volume improved 4.5% and organic volumes were up 3% in developed markets, driven by strength in North America and Europe.

Deeper Insight

Adjusted gross profit margin of 60.3% contracted 40 basis points (bps) from the prior-year quarter, driven by higher raw- and packaging-material expenses. However, this was partially offset by gains from the cost-saving initiatives under the company’s funding-the-growth program.

In the reported quarter, adjusted operating profit of $1,007 million increased 5% while the adjusted operating margin contracting 20 bps to 25.2%. Operating margin decline can be attributed to lower gross margin, partly negated by 30 bps decline in adjusted selling, general & administrative expenses as a percentage of sales.

Year to date, Colgate’s market share of manual toothbrushes has reached 32.5%. Further, the company continued with its leadership in the global toothpaste market with 42.4% market share year to date.

Segment Discussion

North America net sales (21% of total sales) improved 9%, reflecting a 9% increase in unit volumes and 0.5% favorable currency impacts, offset by 0.5% fall in pricing. On an organic basis, sales increased 5% while unit volume grew 5.5%.

Latin America net sales (23% of total sales) inched up 0.5% year over year, driven by 0.5% increase in pricing. However, unit volume and currency remained flat year over year. During the quarter, volume growth in Brazil was negated by soft volumes in Mexico. On an organic basis, sales increased 0.5% as well.

Europe net sales (16% of total sales) rose 16% year over year, due to 4% increase in unit volumes and a favorable currency impact of 14.5%, offset by 2.5% decline in pricing. Unit volumes gained from strength in France and Italy. Organic sales in Europe were up 1.5%.

Asia Pacific net sales (19% of total sales) rose 5.5%, attributable to 0.5% increase in unit volume and positive currency impacts of 5.5%, partly compensated by 0.5% lower pricing. Volumes benefited from strength in India and the Philippines, which was partly neutralized by declines in the Greater China and Australia. On an organic basis, sales for the Asia Pacific were flat.

Africa/Eurasia net sales (6% of total sales) rose 3.5% year over year, fueled by 2.5% higher pricing and 4.5% gains from positive currency, partly offset by 3.5% drop in unit volumes. Lower volumes are attributed to the decline in South Africa. Organic sales for Africa/Eurasia dropped 1%.

Hill’s Pet Nutrition net sales (15% of total sales) were up 5.5% from the year-ago quarter. Results gained from 0.5% rise in unit volumes, 1% increase in pricing and 4% positive impact from currency. Volume gains in the United States, Brazil and Australia were offset by the fall in Japan. On an organic basis, sales rose 1.5%.

Other Financial Details

Colgate ended the first quarter with cash and cash equivalents of $851 million and total debt of $6,709 million. Net cash provided by operating activities was $616 million as of Mar 31, 2018.

Outlook

Looking into 2018, Colgate anticipates the backdrop to remain challenging, due to uncertain global markets and slowing category growth worldwide. However, the company remains on track with the brand building and productivity maximization initiatives. Consequently, it expects net sales to increase in mid-single-digit in 2018 while organic sales are likely to grow in a low to mid-single-digit. Further, the company anticipates witnessing sequential improvement in organic sales through the rest of the year.

Including the impact of the expanded Global Growth and Efficiency Program, the company continues to expect gross margin growth in 2018 along with double-digits increase in GAAP earnings per share.

Excluding the restructuring charges, resulting from the program and other one-time expenses associated with U.S. tax reform in 2017, the company projects strong cash flow generation, gross margin expansion and higher advertising investments in 2018. Further, it anticipates low double-digit earnings-per-share growth for the year, on an adjusted basis.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. There has been one revision higher for the current quarter compared to four lower.

Colgate-Palmolive Company Price and Consensus

Colgate-Palmolive Company Price and Consensus | Colgate-Palmolive Company Quote

VGM Scores

At this time, CL has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

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

Zacks' style scores indicate that the company's stock is suitable for value and growth investors.

Outlook

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

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