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What to Expect From Colgate-Palmolive in Q2

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  • Colgate-Palmolive will announce its second-quarter earnings on Friday. We expect the company’s sales and EPS to continue to fall.
  • Colgate-Palmolive stock has generated stellar growth due to improved organic sales led by increased pricing.
  • We expect the company’s sales to return to growth in the second half of 2019. However, the growth rate could stay low. Also, softness in the US and the high valuations are a concern.

Colgate-Palmolive will announce its second-quarter result on Friday. We expect higher net price realization to drive the company’s organic sales. However, Colgate-Palmolive’s net sales and adjusted earnings could continue to decline.

We expect unfavorable foreign exchange rates and weakness in the US to hurt the company’s net sales in the second quarter. Notably, Colgate-Palmolive beat analysts’ sales estimate during the last reported quarter. However, the company’s top line fell in the previous three quarters. Colgate-Palmolive’s management blamed negative currency exchange rates for the decrease.

Despite the weak top line, Colgate-Palmolive’s underlying sales will likely increase. Higher net price realization and the favorable mix are expected to drive the company’s organic sales growth.

Organic sales growth and the expected moderation in packaging and logistics costs will likely cushion Colgate-Palmolive’s bottom line. Also, share repurchases and a lower effective tax rate will likely support the company’s EPS. However, we expect Colgate-Palmolive’s second-quarter earnings to decline. The lower earnings would reflect weak margins, higher advertising costs, and negative currency rates.

Analysts’ estimates for Colgate-Palmolive

Analysts expect Colgate-Palmolive to post revenues of  $3.87 billion in the second quarter, which implies a marginal decline YoY (year-over-year). The company’s organic sales will likely be supported by higher net pricing, portfolio expansion into newer markets, and premium products. However, currency fluctuations and weakness in the US and China will likely be a drag.

Analysts expect Colgate-Palmolive to post an adjusted EPS of $0.72 in the second quarter, which implies a YoY decline of 6.5%. Notably, Colgate-Palmolive’s adjusted EPS has fallen in the past three quarters. Management blamed currency and cost headwinds for the weakness in the bottom line.

Lower taxes, share buybacks, and higher net pricing are expected to support the company’s adjusted EPS. However, pressure on margins and unfavorable foreign exchange rates will likely hurt the adjusted EPS.

What to expect in moving forward

We expect the Colgate-Palmolive’s revenues and EPS to return to the growth path in the second half of 2019. However, the growth pace might not be impressive. Colgate-Palmolive is up against easier comps in the second half of 2019, which will likely support the growth. Also, expanding into newer markets, an expected recovery in China, and a focus on premiumization will likely drive the company’s sales. Competitive headwinds and softness in the US could limit the sales growth rate.

We expect packaging and logistics costs to moderate in the second half of 2019. However, the costs could continue to take a toll on Colgate-Palmolive’s margins. The earnings decline rate is expected to decelerate in the second half of 2019 due to easier comps. The company’s adjusted earnings fell in the second half of 2018.

Analysts expect a gradual improvement in Colgate-Palmolive’s bottom line in the second half of 2019. The decline rate is expected to moderate sequentially in the third quarter. Meanwhile, analysts expect Colgate-Palmolive’s bottom line to return to growth in the fourth quarter.

Valuation could limit the upside

Colgate-Palmolive will benefit from higher net pricing, moderation in input costs, and product expansion in newer markets. Also, a focus on premiumization should support the company’s growth. However, weakness in the first three quarters of 2019 will likely drag the fiscal earnings down.

So far, Colgate-Palmolive stock has risen 21.6% in 2019. The stock is trading almost on par with analysts’ consensus target price. The upside in Colgate-Palmolive stock reflects the positives. The company’s valuation isn’t attractive due to the low growth expectation.

Colgate-Palmolive stock trades at 25.5x its 2019 expected adjusted EPS of $2.84, which looks expensive given a projected decline of 4% in the EPS in 2019. Most of the analysts have a “hold” recommendation on Colgate-Palmolive stock before the second-quarter earnings.

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