Colgate-Palmolive To See Slower Growth In Fiscal 2019

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Colgate Palmolive‘s (NYSE: CL) adjusted earnings per share (EPS) and revenues came in ahead of market expectations for the fourth quarter, but its GAAP earnings per share missed market estimates. In Q4, Colgate’s net sales were down 2% year-over-year (y-o-y), largely held back by a negative 5% impact from foreign exchange, partially offset by a 0.5% unit volume growth and 2.5% favorable pricing. However, the company’s organic sales improved to 2% in Q4.

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 Is Colgate-Palmolive’s Outlook For 2019 which outlines our forecasts for the company’s full-year 2019 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 Q1

Colgate-Palmolive’s fourth quarter gross margin was 59.1%, down 70 basis points y-0-y. In addition, the company’s operating margin was down 130 basis points to 23.4%. The primary reason for this decline was higher raw and packing materials cost, inflation, and foreign exchange transaction costs, partially offset by cost savings from Funding The Growth initiatives and higher pricing. To give some perspective on the forex 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 Q1 as well. We expect the continued cost pressure from inflation in raw materials and foreign transactional costs to hurt the company’s margins further in the first quarter. We also expect the company to post an increase in its GAAP earnings growth rate in Q1, driven by innovation-led new product launches and cost-saving measures. However, revenues could take a hit due to the ongoing weakness in category demand.

FY 2019 Outlook

Looking ahead in 2019, Colgate-Palmolive expects a year of increased operating cash flow, modestly higher gross margin, increased advertising investment, and a low single-digit EPS decline. The company expects higher pricing for the full year – over two-thirds of its pricing is either rollover pricing from 2018 or pricing already accepted as part of the significant re-launches of the Colgate Total business and the Hill’s Science Diet business. As a result, the company expects its gross profit to increase by 30 to 50 basis points in 2019. In addition, the company also expects growth of 2% to 4% in organic sales for the same period. In terms of commodity costs, the overall value grew 7% in 2018 and the company expects it to grow further by 6% in 2019. In terms of advertising, Colgate-Palmolive expects to generate significant consumer awareness with a record number of in-store displays, which have been developed for this year’s Super Bowl. 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.

 

Overall, we expect Colgate-Palmolive to generate around $15.9 billion in revenues in 2019 and adjusted earnings of around $2.4 billion. Our revenue forecast represents a 2% decline. Of the total expected revenues in 2019, we forecast $13.5 billion to come from the Oral, Personal & Home Care business and nearly $2.4 billion for Hill’s Pet Nutrition. We expect 2019 to be relatively challenging due to higher expected freight and logistics costs, increased competitive activity, a slowdown in growth in some markets, in addition to a stronger dollar. However, we expect the company’s Funding The Growth initiative to help offset some of the high raw material inflation.

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