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Colgate-Palmolive Stock: Will the Valuation Limit More Upside?

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Stock performance

So far, Colgate-Palmolive (CL) shares have generated strong returns in 2019. Colgate-Palmolive’s growth has outperformed its peers and the benchmark index. Colgate-Palmolive stock has risen 20.5% on a YTD (year-to-date) basis as of May 23. Continued organic sales growth and better-than-expected first-quarter results supported the upside in the stock.

Higher pricing is driving the organic sales of household and personal care product manufacturers in the United States. Besides Colgate-Palmolive, improved organic sales due to higher net price realization drove peers’ stocks including Procter & Gamble (PG), Kimberly-Clark (KMB), and Church & Dwight (CHD). However, more competition, distribution losses, and pressure on margins are taking a toll on Clorox (CLX) stock.

Procter & Gamble, Kimberly-Clark, and Church & Dwight shares have risen 16.1%, 14.9%, and 14.3%, respectively, on a YTD basis. So far, Clorox stock has fallen 2.1% in 2019.

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What’s in the outlook?

Colgate-Palmolive’s recent financial performance and continued momentum in the base business are impressive. The company’s net sales are expected to return to the growth trajectory in the second half of 2019, which is positive.

However, Colgate-Palmolive has risen 20.5%, which indicates that the positives are priced in the stock. Colgate-Palmolive stock trades at a forward PE ratio 24.8x, which looks expensive given the projected mid-single-digit decline in its EPS in 2019. The company’s EPS is expected to stabilize in fiscal 2020. However, the growth rate might not be impressive.

We expect pressure on the margins and negative currency rates to continue to hurt Colgate-Palmolive’s EPS in the coming quarters, which could restrict the upside.

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