Steady Demand Growth Could Drive Colgate-Palmolive Stock To Fresh Highs

Having risen more than 1.3x from its low in March 2020, at the current price of $81 per share, we believe Colgate-Palmolive stock (NYSE: CL) has further upside potential. The stock has risen from $62 to $81 off its March 2020 low, much less than the S&P which increased by around 95% from its lows. Further, the stock is up only around 5% from the level it was at before the pandemic in February 2020. We believe that Colgate stock could rise around 10% to set fresh highs around $90, driven by expectations of continuing demand growth, leading to steady revenue and margin growth. Our dashboard What Factors Drove 37% Change In Colgate-Palmolive Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since late-2018 came due to an 8% rise in revenue from $15.5 billion in FY 2018 to $16.7 billion on an LTM basis. Combined with a 2% drop in the outstanding share count, this led to a 10% rise in EPS from $17.90 in FY 2018 to $19.60 currently.

Meanwhile, Colgate’s P/S (price-to-sales) multiple jumped from 3.3x in 2018 to 4.4x by 2020 end, and is currently a little below that level at 4.2x. We believe that the company’s P/S ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of coronavirus and the resulting lockdowns in early 2020 affected manufacturing and supply chain activities, but oral care products being essentials, demand for Colgate’s products was not hampered. Further, with the lockdowns being lifted amidst widespread vaccination, the company’s sales have benefited further. This is evident from Colgate’s Q1 2021 earnings, where revenue came in at $4.3 billion, higher than the $4.1 billion in Q1 2020. Net margins came in roughly at the same level, but EPS dropped to $0.80 from $0.83 over this period. However, a closer look reveals that this was primarily due to a higher effective tax rate (23.9% in Q1 2021 vs 16.4% in Q1 2020).

Additionally, with manufacturing and supply chain activities stepping up to pre-pandemic levels, we believe the company will see further revenue growth in the medium term and this should boost profitability. If the company’s upcoming Q2 2021 earnings confirms this, it will raise investor expectations further, driving up the company’s P/S multiple. We believe that Colgate stock can rise around 10% from current levels, to above its recent high of $86.

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