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Why Colgate-Palmolive’s Valuation Looks Expensive

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CL stock could be heading for a decline

Colgate-Palmolive (CL) stock has risen about 11% on a YTD basis as of March 4 thanks to the improved organic sales during the last reported quarter owing to higher pricing. However, we aren’t impressed given the persisting challenges on both the sales and earnings front.

We expect Colgate-Palmolive’s top and bottom line to remain weak in the near term, reflecting currency volatility, challenges in China, heightened competition, and cost headwinds. Also, the recent uptrend in the stock makes it unattractive on the valuation front.

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Colgate-Palmolive stock trades at 23.3x its 2019 estimated EPS of $2.83. The company’s valuation looks expensive given the projected decline of 4.5% in its EPS and weak sales. In comparison, stocks of rival Procter & Gamble (PG) and Kimberly-Clark (KMB) are trading at a slightly lower multiple and offer a better dividend yield.

PG and KMB stock are trading at a forward PE multiple of 21.5x and 17.7x, respectively. Meanwhile, PG and KMB stock offer a dividend yield of 2.9% and 3.5%, respectively. Colgate-Palmolive’s current dividend yield stands at 2.5%.

Analysts’ near-term estimates  

Analysts expect Colgate-Palmolive’s top line to remain weak in the first half of 2019 and its sales to fall YoY. Adverse currency rates and soft organic volumes could remain a drag. Meanwhile, analysts expect Colgate-Palmolive’s bottom line to register a double-digit decline in the first quarter of 2018. Meanwhile, adjusted EPS are projected to decline at mid-to-high single-digit rate in the second quarter. A weak first-half performance is expected to take a toll on its full-year performance and result in lower EPS.

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