CL reported Q1 2013 EPS this morning and we would expect a bit of a “relief” (if you can call it that after the move the stock has had recently) rally in the name on strength of a very good organic sales growth number (+6.0%) and an EPS result that matched consensus ($1.32). However, at 20.7x calendar ’13 earnings, there seems to be a whole lot of good news already in CL’s stock price, and we can’t come up with any reason to be involved in this name at these levels any way other than on the short side.
What we liked:
- EPS met consensus
- +6.0% organic revenue growth versus a reasonably difficult comp (+6.5%)
- Organic volume growth across segments and regions (even Hill’s)
- 33 bps improvement in gross margins (against the easiest comparison of the year)
- Some modest leverage as +2.7% reported sales growth translated into +3.7% operating income growth
- 13.5% increase in FCF despite higher capital spending
What we didn’t like:
- Most difficult sales comp of the year coming up in Q2 (+8.0%) on both a one and two year basis
- Gross margin comparisons get substantially more difficult as the year progresses
- Margin weakness in Latin America and Hill’s
It’s tough for us to get excited about CL at these levels, even with a good organic sales growth number in the books – however, we said that at $110 as well. Bottom line, the results are reasonable, the multiple is not.
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HEDGEYE RISK MANAGEMENT, LLC