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Why You Should Keep a Safe Distance from Colgate (CL) Stock

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Colgate-Palmolive Company (CL - Free Report) has been losing sheen for quite some time now. This consumer products bellwether has been affected by currency headwinds, which is putting pressure on its top-line performance. The company’s sales have lagged the Zacks Consensus Estimate for three straight quarters now. Looking further behind, sales have missed estimates in six of the last seven quarters.

A look at Colgate’s trailing 12-month price-to-earnings (P/E) ratio reveals that the stock looks pretty overvalued when compared with the industry. The stock has a trailing 12-month P/E ratio of 26.26, which is above its median level of 25.59, but still below the high level of 27.08 scaled in the past one year. This compares unfavorably with the trailing 12-month P/E ratio of 20.24 for the industry. These traits, along with a Value Score of “D”, suggest that the company’s valuation is stretched at the moment, with little upside left for the stock.

We note that shares of this Zacks Rank #4 (Sell) company have inched up 1.1% in the past six months, slightly underperforming the Zacks categorized Soap & Cleaning Preparations industry, which gained 2.3%.

While Colgate posted in-line earnings for the second consecutive quarter, currency headwinds continue to weigh on top-line results for fourth-quarter 2016. Sales bore a 1.5% impact from currency headwinds and lower unit volumes, despite a rise in prices.

Going into 2017, Colgate anticipates the backdrop to remain challenging due to uncertain global markets and lingering currency headwinds. This is likely to hurt both top- and bottom-line results in 2017. Hence, the company provided a bleak outlook for 2017, projecting net sales to grow in the low-single digits range and dollar-basis earnings per share of nearly low-single-digits.

However, the company expects organic sales growth to remain solid, backed by its new product pipeline, appealing marketing programs and strong advertising support. Nonetheless, risks of operating in global markets, intense competition and a sluggish global economy remain major concerns for the company.

Notably, the company’s estimates have trended downward in the past 60 days. Over the said time frame, the Zacks Consensus Estimate for 2017 and 2018 declined 15 cents and 20 cents, respectively, to $2.91 and $3.16.

Conversely, we remain optimistic about Colgate’s funding-the-growth initiatives and the 2012 Restructuring Program, which are expected to contribute significantly toward the improvement of gross and operating margins over the long term. Further, innovation and in-store implementation have been the guiding principles for Colgate’s growth strategy over the years, enabling it to capture market share across all regions and categories.

While these initiatives may spark a turnaround for Colgate over the long term, recent iterations suggest that Colgate should be dumped from your portfolio.

Key Picks

Better-ranked stocks in the broader Consumer Staples sector include Energizer Holdings Inc. ENR, Unilever PLC UL and Blue Buffalo Pet Products, Inc. BUFF, each with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Energizer, with a long-term earnings growth rate of 9.5%, has increased 25.1% in the past three months.

Unilever PLC, with a long-term earnings growth rate of 9%, has climbed 19.4% in the last three months.

Blue Buffalo Pet Products, with a long-term earnings growth rate of 14%, surged 32.3% over the past one year.

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