Why Is Colgate-Palmolive (CL) Down 5% Since Last Earnings Report?

It has been about a month since the last earnings report for Colgate-Palmolive (CL). Shares have lost about 5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Colgate-Palmolive due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Colgate's Q4 Earnings In Line, Sales Beat Estimates

Colgate-Palmolive reported fourth-quarter 2020 results, wherein earnings came in line with Zacks Consensus Estimate, while sales surpassed the same. Moreover, both the top and bottom lines improved year over year. Despite the impacts of the pandemic, the company witnessed robust sales growth, with more than mid-single-digit growth in all segments, particularly double-digit growth in its Hill’s and Latin America businesses.

Moreover, demand remained strong for the majority of its products stemming from the COVID-19 pandemic. Apart from these, an improved gross profit that led to a rise in operating profit and bottom-line growth, on a base business basis, along with product launches and enhanced online facilities bodes well.

Q4 in Detail

Adjusted earnings of 77 cents per share rose 5% from the prior-year quarter and were in line with the Zacks Consensus Estimate. On a GAAP basis, earnings remained flat at 75 cents per share in the quarter under review.

Net sales of $4,324 million improved 7.5% from the year-ago period and beat the Zacks Consensus Estimate of $4,178 million. On an organic basis, the company’s sales advanced 8.5%. Organic sales were aided by improved volumes and higher pricing. Unit volumes increased 6% on a reported basis and 5% on an organic basis.

Further, pricing was up 3.5%. Organic sales growth was mainly led by strength in the Europe, the Asia Pacific, North America and Hill’s segments. However, results were partly hurt by a 2% negative impact of foreign currency.

Adjusted gross profit margin of 61.1% increased 90 bps from the prior-year quarter. In dollar terms, adjusted gross profit rose 9.4% to $2,643 million.

Adjusted selling, general & administrative (SG&A) expenses increased 17.1% year over year to $1,633 million. As a percentage of sales, SG&A expenses escalated 310 bps to 37.8%. Adjusted operating income of $969 million in the third quarter advanced 3% year over year. Meanwhile, adjusted operating margin contracted 100 bps to 22.4% due to higher SG&A expenses, which more than offset better margins.

Colgate’s market share of manual toothbrushes reached 31.1% year to date. Further, the company continued with its leadership position in the global toothpaste market, with a market share of 39.8%.

Segmental Discussion

North America’s net sales (25% of total sales) improved 10%, reflecting a 6.5% rise in unit volumes and 3.5% pricing gains. On an organic basis, sales grew 8.5%, with organic volumes up 5%, mainly driven by growth in the United States and Canada. Year to date, the company’s share in the toothpaste market is at 34.9% and in the manual toothbrush market, it is at 41% in the United States.

Latin America’s net sales (27.9% of total sales) dropped 2.5% year over year, as 9.5% gains in pricing and 1% volume growth were more than offset by a 13% negative currency impact. On an organic basis, sales were up 10.5%, led by growth in Brazil, Argentina, Mexico and Colombia. Organic volumes also grew 1% in the quarter.

Europe’s net sales (22.9% of total sales) increased 14% year over year on an 8.5% rise in unit volumes and a 6.5% gain from favorable currency exchange rates, which more than offset the 1% negative impact of pricing. Organic sales in Europe were up 4.5%, driven by a 5.5% increase in organic volumes as well as growth in France, Poland, the U.K. and Germany.

The Asia Pacific segment’s net sales (29.8% of total sales) improved 7% on a reported basis and 5% on an organic basis. This growth is attributable to a 4% rise in unit volumes (both reported and organic) and 1% pricing gains. Sales growth in the Asia Pacific was mainly led by India, Greater China and South Pacific.

Africa/Eurasia’s net sales (13.1% of total sales) decreased 1.5% year over year due to a 4.5% increase in unit volumes and 3.5% in pricing, offset by a 9.5% adverse impact from foreign exchange. Organic sales for Africa/Eurasia improved 8%, driven by gains in Russia and Turkey. Organic volumes in the region were up 4.5%.

Hill’s Pet Nutrition’s net sales (26% of total sales) grew 16% from the year-ago quarter on a reported basis and 14.5% on an organic basis. Results gained from an 11% increase in unit volumes (both reported and organic) and 3.5% pricing growth. Sales were aided by gains in the United States, Europe, Canada and Australia.

Other Financial Details

Colgate ended fourth-quarter 2020 with cash and cash equivalents of $888 million, and total debt of $7,601 million. Net cash provided by operating activities amounted to $3,719 million as of Dec 21, 2020.

Outlook

Backed by decent fourth-quarter results, Colgate issued its guidance for 2021. It predicts net sales growth of 4-7%, with a favorable currency impact. Organic sales are likely to rise 3-5%. Further, it expects gross margin expansion on both GAAP and adjusted basis, with an increase in advertising investments.

Additionally, the company anticipates GAAP earnings per share to increase in low to mid-single digits. Meanwhile, adjusted earnings per share are projected to grow in mid to high-single digits.

That said, management envisions a higher level of uncertainty related to COVID-19 in 2021. Also, volatility in raw material, higher logistics costs and currency headwinds remain concerning.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision.

VGM Scores

At this time, Colgate-Palmolive has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Colgate-Palmolive has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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