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Cost Savings to Aid Colgate's (CL) Q3 Earnings Amid Hurdles?

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Colgate-Palmolive Company (CL - Free Report) is slated to release third-quarter 2017 results on Oct 27. The question lingering in investors’ minds is whether this consumer goods behemoth will be able to deliver a positive earnings surprise in the quarter to be reported. The company has posted in-line earnings in three out of the past four quarters, though its top line has missed the Zacks Consensus Estimate for nearly four years now. Let’s see how things are shaping up prior to this announcement.

What to Expect?

The current Zacks Consensus Estimate for the quarter under review is pegged at 73 cents, which is in line with the year-ago period figure. Also, the earnings estimate has been stable over the last 30 days. Notably, analysts polled by Zacks expect revenues of $3,928 million, up 1.6% from the year-ago quarter.

Factors Driving this Quarter

Colgate has been witnessing soft sales for quite some time now. While its dismal sales surprise history has already been highlighted above, we note that this global consumer goods big-wig hasn’t witnessed year-over-year sales growth for quite some time. On the contrary, the company’s bottom line has risen year over year for four straight quarters now, thanks to its robust cost-saving initiatives. Thus, the company’s shares have gained 13% so far this year, though it lagged the industry’s rally of 17%.



Glimpse of Q2 & Estimates for Q3

In the last quarter, Colgate’s sales dipped 0.5% as benefits of 1% increase in prices were offset by a 1% drop in global unit volumes and a negative impact of 0.5% from currency fluctuations. Further, sales were hurt by the persistent softness in North America and challenges in Asia-Pacific. However, this was somewhat offset by strong organic sales growth in Latin America and the return to positive organic sales growth in Hill’s Pet Nutrition. Also, better pricing and gains from the company’s funding-the-growth and 2012 Restructuring Program boosted the gross margin, alongside helping earnings jump 3% year over year.

Notably, sales from Latin America constituted about 26% of Colgate’s total revenues, which is the highest among all regions. For the third quarter, the Zacks Consensus Estimate for sales growth in this region is a marginal 0.1%, backed by a slight rise in organic sales and volumes. On the other hand, the Zacks Consensus Estimate for North American sales growth is pegged at a dip of 0.01%. This fares better than a 3.5% decline in the previous quarter. For the company as a whole, the consensus estimate for sales growth is currently pegged at 0.02%, on organic sales increase of 0.02%. While the consensus estimate for volume growth is flat for the quarter to be reported, pricing is anticipated to have a positive impact of 0.01% on the top line — which in turn should fuel the bottom line growth.

Robust Strategies to Drive the Bottom Line

During the second-quarter conference call, management projected the backdrop to remain challenging due to uncertain global markets and slowing category growth worldwide. Nevertheless, the company remains encouraged by the progress of its 2012 Restructuring Program and continues to pursue additional savings opportunities under the program. In this regard, the company stated that the additional opportunities identified in the second quarter provide visibility for reaching the upper end of its previously announced cost and savings guidance range. We believe that benefits from these initiatives and revenue contributions from Latin America should help drive Colgate’s bottom line in this quarter as well.

What the Zacks Model Unveils?

Our proven model shows that Colgate may beat earnings estimates because it has the right combination of two key components.

Zacks Rank & ESP: Colgate currently carries a Zacks Rank #2 (Buy). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 or 3 (Hold) have a significantly higher chance of beating earnings.

Further, the company currently has an Earnings ESP of +0.50%. A favorable Zacks ESP serves as a meaningful and leading indicator of a likely positive earnings surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter. The combination of Colgate’s Zacks Rank #2 and a positive ESP make us reasonably confident of a positive earnings beat.

Other Stocks with Favorable Combination

Here are some other companies you may want to consider as our model shows that these also have the right combination of elements to post an earnings beat:

Pinnacle Foods Inc. has an Earnings ESP of +2.03% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Carter's, Inc. (CRI - Free Report) has an Earnings ESP of +1.33% and a Zacks Rank #2.

The Estée Lauder Companies Inc. (EL - Free Report) has an Earnings ESP of +0.34% and a Zacks Rank #2.

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