What To Expect From Colgate-Palmolive’s Q4

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Colgate Palmolive (NYSE: CL) is scheduled to announce its fourth quarter results on Friday, January 25. In the first nine months of fiscal 2018, Colgate’s net sales grew slightly year-over-year (y-o-y) to $12 billion, driven by volume growth of 1.5% and flat net selling prices and foreign exchange. In addition, the company’s organic sales increased by 0.5% y-o-y during this period.

Colgate-Palmolive’s stock price has declined nearly 20% over the course of 2018, due to the continued uncertainty in global markets. Our $63 price estimate for Colgate-Palmolive’s stock is marginally ahead of the current market price. We have created an interactive dashboard on Colgate-Palmolive Will Likely See A Challenging End To Fiscal 2018, 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.

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. Of late, currency fluctuations have remained a major headwind for the company. 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 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. In addition, the company expects the additional pricing taken during the third quarter to flow through, and anticipate less of an impact from destocking 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.

Fiscal 2018 Outlook

Looking ahead in 2018, Colgate-Palmolive expects a year of increased operating cash flow, modestly lower gross margin, flat advertising investment, and mid-single-digit EPS growth. The continued increase in raw material costs including the impact of transactional foreign exchange will continue to pressure gross margins. The company now expects that advertising will be flat on both an absolute basis and as a percentage of sales for the full year as compared to 2017. This change is due to some of the macro headwinds in markets like Argentina as well as some divisional mix issues. In addition, the company plans to focus on e-commerce, which could turn into a key growth driver in some key businesses. The company’s current e-commerce sales only account for a mid-single-digit percentage of its overall sales.

We expect 2018 to be relatively challenging due to higher expected freight and logistics costs, increased competitive activity and a slowdown in growth in some markets. However, we expect the company’s Funding The Growth initiative to help offset some of the high raw material inflation. Further, we also expect Colgate’s revenues to be driven by ongoing innovation in products such as toothpaste and soaps and also benefit from population growth, particularly in emerging markets. Overall, we expect Colgate-Palmolive to generate around $15.8 billion in revenues in 2018 and adjusted earnings of around $2.7 billion. Our revenue forecast of $15.8 billion represents year-on-year growth of nearly 2%. Of the total expected revenues in 2018, we forecast $13.5 billion to come from the Oral, Personal & Home Care business and nearly $2.3 billion for Hill’s Pet Nutrition.

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