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General skepticism surrounding the household and personal care industry, weakening fundamentals at Colgate-Palmolive Company (NYSE:CL) and valuation have made Morgan Stanley cautious on the stock.
The Analyst
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Dara Mohsenian downgraded Colgate-Palmolive from Overweight to Equal Weight and lowered his price target from $80 to $69.
The Thesis
Weak first-quarter organic sales results led to the downgrade, although the stock was little changed amid low expectations and a profit beat orchestrated by lower-than-expected ad spend, Mohsenian said in a Monday note.
Organic sales growth slowed to 1.4 percent on an average two-year basis in the last two quarters compared to a 4.5-percent average over five years, which casts doubts on long-term growth potential, the analyst said. Morgan Stanley now estimates 3.5-percent organic sales growth in the long term versus Colgate's 3.5-percent guidance.
Notwithstanding a weakening top-line trend, the valuation of the stock has expanded relative to peers, jumping 700-800 basis points since September, Mohsenian said.
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Colgate suggested on the earnings call that developed market trends are improving, the analyst said. Emerging markets, which Mohsenian said are a key driver of Colgate's premium valuation and a strategic potential "halo," are decelerating.
Brand demand fragmentation, increased competitive intensity and lower pricing with less inflation and forex pressure are the contributors to a "sustained" emerging market slowdown, according to Morgan Stanley.
The sell-side firm lowered its 2018 and 2019 EPS estimates for Colgate by 11 percent and 2 percent to $3.17 and $3.38, respectively, citing lower top-line assumptions.
The Price Action
Colgate-Palmolive shares have lost about 10.8 percent year-to-date. The stock was down 2.28 percent to $65.07 at the time of publication Monday.
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Photo by Dwight Burdette/Wikimedia.
Crypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.