Colgate-Palmolive Q2’16 Preview: Currency Impact to Offset Revenue Growth From Higher Prices

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Colgate Palmolive

Colgate Palmolive (NYSE:CL) will release its Q2’16 earnings on July 28th. The company has seen its reported revenue base decline in the last 2 years, despite continuous increase in organic sales, primarily due to adverse currency impacts. The trend persisted in Q1 2016 as well. Colgate witnessed a 5% year-over-year increase in its organic sales, but due to an 8% negative foreign exchange impact, net sales were down 7.5%. The negative currency impact, higher raw material costs and de-consolidation of the company’s Venezuelan operations led to a 4% decline in non-GAAP operating profits, to $922 Million, in Q1 2016. (Read Our Q1’16 Earnings Article)

The US dollar has strengthened against most of the major currencies in the world, except Brazilian Real, in the last three months. We expect this will be reflected in net sales in Q2 as well. USD has weakened by approximately 10% against the Brazilian Real in the last three months. This could help offset (to some extent) the negative impact of the other currencies’ depreciation against USD, as Colgate derives more than 20% of its revenue from Latin America, and Brazil is the biggest market there.

Additionally, consumer confidence indices of most of both developed and emerging markets have improved over the last quarter, justifying the increased revenue estimates sequentially.

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Colgate-Q2-pic1

 See our complete analysis for Colgate-Palmolive

Higher Cost of Raw Materials Indicate Further Price and Revenue Increases

  • Emerging markets form 51% of total net sales reported by Colgate Palmolive. In Q1, 40% of total sales were contributed by Latin America and Asia alone (23% and 17% respectively).
  • The Producer Price Index , which measures the changes in cost of goods and services sold in a country, has gone up significantly in emerging markets during Q2.
  • To offset this higher cost, the company will have to increase its prices, which will indirectly increase the net sales value. Otherwise, it will have to bear the brunt of decreasing operating margins.
  • Surprisingly, the unit volumes (excluding the impact of de-consolidation of Venezuelan operations) in Latin America grew by 2.5% even after a 7% price increase. If this trend continues in Q2 , then it may lead to a positive impact on organic sales.

PPI

In the following chart, we have given our estimates of how operating profits of Colgate-Palmolive might change in the future.

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