Colgate-Palmolive’s Valuation Could Limit the Upside

Colgate-Palmolive’s (CL) sustained momentum in organic sales and expected improvement in sales in the second half of 2019 supported the upside in the stock. The company’s volumes improved in the first quarter, which is impressive.

A consistent improvement in the base business drove Colgate-Palmolive shares, which rose 19.9% on a YTD (year-to-date) basis as of April 29. While we’re impressed with the company’s recent performance, we don’t like its high valuation.

Colgate-Palmolive stock trades at a forward PE ratio of 24.7x, which is higher than its four-year average historical multiple of 23.1x. Colgate-Palmolive stock trades at a premium to Procter & Gamble (PG) and Kimberly-Clark (KMB) stock. Procter & Gamble continued to post stellar organic sales. The company managed to improve its bottom line in the past several quarters.

We expect Colgate-Palmolive to show a sequential improvement. However, the company’s sales and earnings are expected to decline in the near term. Colgate-Palmolive’s EPS is expected to mark a mid-single-digit decline in 2019, which makes its current valuation unattractive. The company’s bottom line is expected to stabilize in 2020. However, the projected low growth rate doesn’t support its current valuation multiple.

Colgate-Palmolive’s net sales are expected to decline in the second quarter of 2019, which reflects negative currency rates. Analysts expect the company’s sales to improve in the second half of the year. However, the growth will likely stay very low.

Negative currency rates and margin headwinds will likely drag Colgate-Palmolive’s bottom line down in the coming quarters. Analysts expect Colgate-Palmolive’s adjusted EPS to fall ~5% in 2019.