Morgan Stanley Catches Flack For Colgate-Palmolive Upgrade

The firm continues to rate Colgate-Palmolive at Overweight, as it sees significant relative stock underperformance on a transitory top-line slowdown as a rare opportunity to buy an attractive business at a valuation close to structurally less attractive peers.

The firm's price target for the shares is $84.

Analyst Dara Mohsenian listed the four key pushbacks to the firm's upgrade, namely:

1. A slowdown in the U.S. household product category.
2. Low visibility into the emerging market recovery.
3. The stock's valuation.
4. An overblown consolidation halo around the company.

See also: Here's What Nelson Peltz Could Do With Procter & Gamble

Best Positioned To Withstand The Slowing US HPC

Morgan Stanley noted that the slowdown in the U.S. household product category is seen to limit a top-line rebound for Colgate-Palmolive. However, the firm thinks the company is best positioned among large-cap peers to withstand this issue. Also, the firm sees a sentiment shift to emerging market-centric Colgate-Palmolive versus peers as the issue burgeons.

Morgan Stanley clarified that the company has the lowest exposure to the U.S. of large-cap names, roughly only 25 percent of sales compared to about 44 percent for mega-cap peers. The firm also thinks the company's exposure to personal care/oral care protects its categories from pricing pressure, given its strong brand equity, pricing power and lower private label penetration.

Clear Inflection Point In Emerging Point Growth

While worries about low visibility into an emerging markets recovery abound, the firm said it believes a clear inflection point in emerging market growth is now evident.

The firm said this has been confirmed by Morgan Stanley economist forecasts, the market pricing in an emerging market recovery with strong emerging market stock market performance and strengthening emerging market currencies.

"Our companies virtually across the board have indicated that EM trends have bottomed, with China rebounding, and other EMs bouncing along the bottom," the firm said.

Attractive Valuation

Against the popular notion that Colgate-Palmolive valuation isn't attractive, the firm thinks they are undervalued by several measures. The firm said the company's shares are trading nearly one standard deviation below its average premium versus the S&P 500, not just mega-cap peers.

Distinctive Strategic Asset

Countering the point that the company's consolidation halo is overblown, the firm said it is a distinctive strategic asset among mega-cap names. The firm noted multiple potential strategic partners such as Kraft Heinz Co KHC, Unilever plc (ADR) UL and Johnson & Johnson JNJ have been mentioned in the media as opposed to just one, namely Anheuser Busch Inbev NV (ADR) BUD for The Coca-Cola Co KO or PepsiCo, Inc. PEP, or the little strategic optionality for Procter & Gamble Co PG, due mostly to its size.