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We remain positive on CL as it remains one of the few companies in HPPC delivering robust organic sales growth, globally. FX headwinds are impacting results and sentiment but, over the longer-term, we expect the stock to outperform.

3Q13 Thoughts

Colgate reported another slight top-line miss, the second in a row, but managed earnings to $0.73, which was in line with consensus estimates.

In our view, the most substantial positive, which bodes well for the longer-term potential of the company, was the ongoing top-line resilience in emerging markets. The negatives included a stronger-than-expected FX headwind and sequential volume deceleration in the United States.

Even with expectations pinned at the high end of the company’s (reiterated) EPS guidance range of 4.5-5.5%, we believe long-term upside in earnings potential will attract investors over the next three years. The company offered initial EPS guidance for 2014 of positive double digit growth, which should continue to justify its premium multiple.

Over the long term, we continue to see CL as one of the best stocks in personal care on the long side. On a relative basis, versus its peers, we believe the stock is less vulnerable to a rising rates environment, given its growth profile and future prospects. Additionally, there is plenty of room for sentiment to improve, particularly on the sell-side (3rd least-liked stock in HPPC on the sell-side).

CL Organic Growth Continues to Impress - hppc sentiment

What we liked from the CL 3Q13 release

  • EPS met consensus expectations
  • Organic growth came in at 6%, a solid number despite being slightly below the Street
  • Continuing strong performance in EM’s – taking share across categories
  • Commodity outlook remains benign
  • Gross margin expansion despite a sequentially tougher comp (chart below)
  • US EBIT margin improvement accelerated in 3Q to +370 bps, resulting in 31.5% margin
  • Hill’s organic sales of 6% surprised to the upside

CL Organic Growth Continues to Impress - CL Gross Margin

What we didn’t like from the CL 3Q13 release

  • EBIT year-over-year growth of 1.2% versus 1.5% sales growth
  • FX continues to be a substantial drag on earnings
  • LatAm EBIT margins declined once again

Rory Green

Senior Analyst