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Colgate-Palmolive (CL) Down 1.1% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Colgate-Palmolive (CL - Free Report) . Shares have lost about 1.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Colgate-Palmolive 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 Earnings Surpass Estimates in Q3, Sales Miss

Colgate has reported third-quarter 2019 results, wherein the bottom line beat estimates but sales missed. In the quarter, gains from strong volume growth and robust price increases were offset by unfavorable foreign currency. The company reiterated its earnings and sales guidance for 2019 but raised view for organic sales growth.
 
Adjusted earnings of 71 cents per share dipped 1% from the prior-year quarter and beat the Zacks Consensus Estimate of 70 cents. Including one-time items, earnings were 67 cents per share compared with 60 cents in the year-ago period.Total net sales of $3,928 million rose 2.2% from the year-ago period but missed the Zacks Consensus Estimate of $3,957.2 million. The year-over-year improvement can be primarily attributed to 3% increase in global unit volume and 1.5% rise in pricing, somewhat offset by a negative currency impact of 2.5%. On an organic basis, the company’s sales improved 4.5%. This marked the fourth consecutive quarter of sequential improvement in organic sales growth.

Let's Delve Deeper

Adjusted gross profit margin of 59% declined 20 basis points (bps) from the prior-year quarter, driven by escalated raw and packaging material expenses, including foreign-currency transaction costs. This was somewhat offset by gains from cost savings under funding-the-growth program. In the reported quarter, adjusted operating profit of $900 million was flat with the year-ago quarter. However, adjusted operating margin contracted 50 bps to 22.9%. Operating margin was mainly impacted by a decline in gross margin and 30-bps rise in adjusted selling, general & administrative expenses, as a percentage of sales. Higher advertising investment caused rise in SG&A expenses, which was partly negated by lower overhead costs.

Year to date, Colgate’s market share of manual toothbrushes reached 31.6%. Further, the company continued with its leadership position in the global toothpaste market, with 41.2% year-to-date market share.

Segmental Discussion

North America’s net sales (22% of total sales) improved 1.5%, reflecting 0.5% rise in unit volume and a 1% improvement in pricing along with flat currency rates. On an organic basis, sales grew 1.5%.

Latin America’s net sales (23% of total sales) rose 3% year over year on unit volume growth of 4.5% and price increases of 3.5%, partly compensated by negative currency impact of 5%. During the quarter under review, volume benefited from gains in Brazil, Central America, Colombia and Mexico. On an organic basis, sales were up 8%.

Europe’s net sales (15% of total sales) dropped 5% year over year on 1.5% decline in pricing and 5% adverse impact of unfavorable currency exchange, somewhat offset by 1.5% growth in unit volume. Volume benefited from gains in France, Spain and the U.K., offset by a decline in Germany. Further, organic sales in Europe remained flat year over year.

The Asia Pacific’s net sales (18% of total sales) improved 2.5%, attributable to 2% rise in unit volume and 1% pricing gains, offset by a 0.5% negative impact of unfavorable currency rates. Volume growth stemmed from gains in the Philippines, Australia, India, New Zealand and Greater China, somewhat compensated by a decline in Malaysia. On an organic basis, sales for the Asia Pacific rose 3%.

Africa/Eurasia’s net sales (6% of total sales) grew 5% year over year, owing to 3% rise in unit volume and a 4% increase in pricing, offset by currency headwinds of 2%. During the quarter, volume gains in Russia, the Gulf States and Kenya were partly negated by a decline in South Africa. Organic sales for Africa/Eurasia improved 6%. Hill’s Pet Nutrition’s net sales (16% of total sales) rose 8.5% from the year-ago quarter. Results gained from a 6.5% increase in unit volume and 3.5% rise in pricing, offset by a 1.5% negative impact of currency. Volume growth in the United States and Western Europe were partly negated by soft volume in South Africa. On an organic basis, sales were up 10%.

Other Financial Details

Colgate ended third-quarter 2019 with cash and cash equivalents of $948 million, and total debt of $8,151 million. Net cash provided by operating activities amounted to $2,163 million as of Sep 30, 2019.

Outlook

Going into 2019, the company expects top-line gains, backed by accelerated investment in brands, higher pricing and strong innovation. It expects sales to be between flat and up low-single digit, based on current spot rates. Moreover, it now estimates organic sales growth of 3-4% compared with 2-4% rise mentioned earlier. The revised view is in line with organic sales growth recorded in the year-to-date period. Moreover, the company anticipates a slight decline in gross margin in 2019, both on a GAAP and adjusted basis. Further, it continues to expect higher advertising spending throughout 2019. On a GAAP basis, earnings per share for 2019 are likely to decline in a low-single digit. Meanwhile, adjusted earnings per share are expected to decline in a mid-single digit.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

Currently, Colgate-Palmolive has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

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


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