Colgate-Palmolive Will Likely See A Challenging End To Fiscal 2018

by Trefis Team
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Colgate Palmolive‘s (NYSE: CL) adjusted earnings per share (EPS) came in line with expectations at $0.72, but revenues missed market expectations for the third quarter. The company witnessed another challenging quarter, due to rising commodity costs and volatile exchange rates, in addition to weak category demand in many key markets. In Q3, Colgate’s net sales were down 3% year-over-year (y-o-y) while organic sales declined marginally at 0.5% y-o-y, largely held back due to market volatility in Brazil and trade inventory reductions in China. In addition, the company reported unit volume declines globally.

Colgate-Palmolive’s stock price has declined more than 20% over the course of 2018, due to the continued uncertainty in global markets. Our $63 price estimate for Colgate-Palmolive’s stock is slightly ahead of the current market price. We have created an interactive dashboard on What To Expect From Colgate-Palmolive’s Q4 which outlines our forecasts for the company’s Q4 results. You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

What Drove The Company’s Net Profit Decline Over The Quarter?

Colgate-Palmolive’s net income declined 15% y-o-y, primarily due to a decline in Oral, Personal and Home Care revenues – which fell by about $40 million sequentially. The company also increased its SG&A spending over the quarter, leading to a decline in operating margins and profits. Below, we illustrate the various factors that were responsible for the company’s net income decline.

Revenues, Margins Could Decline In Q4

Colgate-Palmolive’s third quarter gross margin was 59%, down 100 basis points y-0-y. In addition, the company’s operating margin was down 60 basis points to 22.7%. The primary reason for this decline was higher raw and packing materials cost and inflation. Overall, the current market remains challenging with crude oil, a key feedstock for many raw materials, increasing more than 50% compared to this time last year. Of late, currency fluctuations have remained a major headwind for the company – with the Turkish lira devaluing 25%, the Argentine peso more than 40%, and the Indian rupee nearly 10%. To give some perspective on this impact, nearly 75% of Colgate’s net sales are generated from markets outside the U.S., with approximately 50% of the company’s net sales coming from emerging markets (Latin America (25%), Asia Pacific (18%), and Africa/Eurasia (6%). Going forward, the company’s revenues could fall if the market volatility continues into Q4 as well. We expect the continued cost pressure from inflation in raw materials and input costs to hurt the company’s margins further in the fourth quarter.

We also expect the company to continue to post an increase in its earnings growth rate in Q4, driven by innovation-led new product launches, cost-saving measures, and a lower effective tax rate. However, revenues could take a hit due to the ongoing weakness in category demand.

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