Colgate-Palmolive's Weak Sales Growth 'Will Become The Norm,' Macquarie Says In Downgrade

Colgate-Palmolive Co. CL reported weaker-than-expected second-quarter sales Friday and lowered its net sales growth projection.

The Analysts

Macquarie analyst Caroline Levy downgraded Colgate-Palmolive from Outperform to Neutral and lowered the price target from $74 to $65.

The Thesis

Despite CL’s EPS results, which matched consensus estimates, organic sales growth was below analysts' expectations.

This low growth was driven by increased material costs and other headwinds, accounting for a disappointing second quarter in all aspects, Levy said in the downgrade note. (See the analyst's track record here.) 

“We believe the company’s underwhelming organic sales growth in the second quarter [of 0.3 percent] will become the norm for the remainder of fiscal 2018, as the company tries to protect margins with price hikes beginning in Q3, placing even more pressure on volumes,” the analyst said. 

Productivity savings should offset higher freight costs, but commodity costs will hurt margins, Levy said. While there is value in in CL’s global brand franchises, Macquarie projects that a spike in growth is unlikely in the foreseeable future.

Cost pressures are likely to remain escalated going forward, Levy said. 

In a Friday conference call, Colgate-Palmolive CEO Ian Cook said rising commodity costs and "volatile" exchange rates have pressured Colgate's profit and loss.

" ...We have sometimes questioned if we’re responding with an appropriate sense of urgency,” Cook said.

Price Action

CL shares were down 0.3 percent at $66.46 at the close Monday. 

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