Colgate Stock At Its Peak Despite No Returns In Over 2 Years?

Despite a 22% rise since its low in March, at the current price of $73 per share we believe Colgate stock (NYSE: CL) has reached its near term potential. Colgate stock has rallied from $60 to $73 off the recent bottom compared to the S&P which moved 38%. However, Colgate’s stock is up only about 3% from levels seen in early 2018, a little over 2 years ago.

Colgate stock has almost reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it appear fully valued as, in reality, demand and revenues will likely be slightly lower than last year.

Some of this change over the last 2 years is justified by the roughly 1.5% growth seen in Colgate’s revenues from 2017 to 2019, which translated into a 16% growth in Net Income (earnings margin grew almost 15%). This combined with a 2% drop in outstanding share count, led to a 20% rise in earnings on a per share basis.

Its PE multiple has seen a slight decrease over this period, due to lower emerging market demand growth and foreign currency headwinds. Further, we believe the stock is unlikely to see significant upside despite the recent rally, owing to the potential weakness from a recession driven by the Covid outbreak. Our interactive dashboard What Factors Drove 3.4% Change in Colgate Stock between 2017 and now? has the underlying numbers.

Colgate’s PE multiple has changed from 31x in 2017 to 25x in 2019. While the company’s PE is now roughly 27x, there is possible downside when the current PE is compared to levels seen in the past years: PE of 21x at the end of 2018 and 25x as recently as late 2019.

So what’s the likely trigger and timing for this downside?

While the global spread of Coronavirus has boosted demand for hygiene products, the resulting lock downs in many countries has impacted supply chain logistics, and this could impact Colgate’s revenues and earnings over 1H 2020. We believe Colgate’s Q2 results at the end of July will confirm the hit to its revenue. Whether it accompanies a lower 2H 2020 guidance or not, remains to be seen.

If there isn’t clear evidence of containment of the virus at the time of the earnings announcement, we believe the stock will see its P/E decline marginally from the current level of 27x to 25x, which combined with a slight reduction in revenues and margins could result in the stock price shrinking to around $65.

While Colgate stock doesn’t seem to have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That Could Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Our dashboard forecasting U.S. Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture.
The complete set of coronavirus impact and timing analyses is available here.

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