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Colgate Stock Loses Ground: Can Strategies Aid a Turnaround?

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Colgate-Palmolive Company (CL - Free Report) has been losing ground due to dismal top line trend and strained margins for quite a while now. Moreover, the company remains exposed to tough operating environment due to uncertain global markets and slowing category growth rates across some of its major markets. Raw material cost inflation, adverse foreign currency translations and stiff competition are other concerns.

Consequently, this Zacks Rank #4 (Sell) stock has lost 19% in a year, underperforming the industry’s decline of 1.4%.

Let’s Delve Deep

Colgate has lagged sales estimates in 21 of the last 22 quarters now. Unfortunately, management continues to expect net sales decline in low-single digits for the fourth quarter of 2018, mainly due to foreign exchange headwinds. However, it projects organic sales to increase low-single-digit in the same period.

Additionally, sales dipped 3% year over year in the third quarter due to unfavorable currency and flat global unit volume, somewhat offset by higher pricing. On an organic basis, sales dropped 0.5%. Colgate’s top line was further hurt by trade inventory reductions in China and volatility in Brazil.

Despite benefiting from its savings program, Colgate has been battling margin pressures for last few quarters. In the third quarter of 2018, the company marked its fourth straight gross margin contraction and sixth consecutive operating margin decline. Gross margin contracted 120 basis points (bps), mainly due to higher raw and packaging material expenses. Lower gross margin coupled with higher selling, general & administrative expenses induced an operating margin decline of 190 bps in the quarter.

Moving ahead, higher advertising expenses related to product innovations, core businesses and consumption-building initiatives might dent margins.

While these factors make us apprehensive about Colgate’s performance in 2019, the company seems to be progressing well with its savings programs. This, in turn, might aid the stock to return on its growth trajectory.

Notably, the Global Growth and Efficiency Program or 2012 Restructuring Program and the Funding the Growth initiatives bode well for the company. Acknowledging the success of the Global Growth and Efficiency Program, the company’s board has approved an expansion and extension of the program through Dec 31, 2019. This will enable Colgate to take advantage of the incremental opportunities in streamlining operations. It expects after-tax savings of $500-$575 million from the program.

Colgate’s four-year Global Growth and Efficiency Program focuses on reducing structural costs to boost gross and operating profits, standardizing processes to improve the decision-making procedure and strengthening its market share position worldwide. Meanwhile, Funding the Growth initiative mainly aims at opening new environmentally sustainable distribution centers to offer better service besides reducing fuel and transportation costs. These programs are expected to contribute significantly toward the expansion of gross and operating margins in the long term.

Earnings View & Surprise Trend Hold Optimism

Despite strained margins and a challenging backdrop, management expects a 3-4% improvement in adjusted earnings per share in 2018 versus last year. Moreover, it continues to anticipate double-digits increase in GAAP earnings per share. It also expects to continue with its robust operating cash flows.

It is imperative to mention that Colgate has maintained a meet or beat earnings track record for a long time now. Its long-term earnings growth rate of 6.9% supports our view.

Want Better-Ranked Consumer Staples Stocks? Check These

Archer Daniels Midland Company (ADM - Free Report) outpaced the earnings estimates in each of the trailing four quarters by an average surprise of 26.9%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Procter & Gamble Company (PG - Free Report) delivered average positive earnings surprise of 3.2%. The company carries a Zacks Rank #2 (Buy).

Church & Dwight Co., Inc. (CHD - Free Report) is also a Zacks Ranked #2 stock, which has an expected long-term earnings growth rate of 10.1%.

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