Here’s Why You Should Avoid Colgate Palmolive Stock

CL: Colgate Palmolive logo
Colgate Palmolive

Colgate Palmolive stock (NYSE: CL) is up around 20% since the beginning of 2020, and at the current price around $82 per share, we believe that Colgate stock has around 10% potential downside.

Why is that? Our belief stems from the fact that Colgate, an oral care and pet nutrition product manufacturer, has seen its stock rise almost 40% since the end of 2018. Further, with new players entering the oral care and pet nutrition market, we believe Colgate stock could see some downside. Our dashboard What Factors Drove 38% Change In Colgate Palmolive Stock Between 2018 And Now? provides the key numbers behind our thinking, and we explain more below.

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Colgate’s price rise since 2018 came despite just a 1% increase in revenues from 2018 to 2019 which, due to lower net margins, resulted in a 1% drop in net income. This combined with a roughly 1% drop in the outstanding share count, led to EPS remaining unchanged at $2.76.

Further, Colgate’s P/E (price-to-earnings) ratio rose from 21.6x in 2018 to 25x in 2019, and has since jumped to 30x, riding the rally in the S&P. Given that new players are eating into Colgate’s market share, we believe there is a possible downside risk for the P/E multiple.

So what’s the likely trigger and timing to this downside?

The global spread of Coronavirus saw a drop in Colgate’s revenues and earnings in Q2 2020, but with supply chain activities back on track, revenue jumped to a quarterly high of $4.3 billion in Q3 2020, driving EPS to $0.81. However, the oral care market has seen a lot of new players lately, many of which target a premium market, and with people focusing more on their oral health than ever before, this could erode  Colgate’s market share. The impact of this on Colgate’s business will become evident over FY 2021, and we expect revenue growth to stay low in the near to medium term. If the company is not able to control expenses, we believe the stock will see its P/E multiple decline from the current level of 30x to around 27x, which combined with a reduction in revenues and margins could result in the stock price shrinking to as low as $73, a downside of over 10% from the current price near $82.

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