Colgate Palmolive Stock: A Smart Buy?

Up only 25% from its low in March 2020, at the current price of $75 per share, we believe Colgate-Palmolive stock (NYSE: CL) has significant upside potential. Colgate stock has increased from $60 to $75 off the recent bottom, much less than the S&P which increased by around 70% from its lows. Further, the stock is around the same level it was at before the pandemic, and we believe that Colgate stock could regain its 2020 high of $86, rising around 15% from its current level around $75, driven by expectations of strong demand and strong full-year 2020 results despite the pandemic. Our dashboard What Factors Drove 27% Change In Colgate Palmolive Stock Between 2018 And Now? has the underlying numbers behind our thinking.

The stock price rise since 2018-end came due to a 5% rise in revenue from $15.7 billion in FY 2019 to $16.5 billion in FY 2020. Further, net margins rose from 15.1% to 16.4%, driving a 14% rise in EPS from $2.76 in FY 2019 to $3.15 in FY 2020, despite a roughly unchanged outstanding share count.

Colgate’s P/E (price-to-earnings) multiple rose from 22x in 2018 to 27x by 2020 end, but has since dropped to 24x, as the markets are pulling back from recent highs. We believe that the company’s P/E ratio has the potential to rise further in the near term on expectations of continuing demand growth and a favorable shareholder return policy, thus driving the stock price higher.

Where Is The Stock Headed?

The global spread of Coronavirus saw a drop in Colgate’s revenues and earnings in the first half of 2020, but with supply chain activities back on track, revenue jumped to a strong $16.5 billion for FY 2020, up from $15.7 billion in FY 2019. The company managed to somewhat control expenses, and operating margins rose to 23.6% from 22.6%, driving EPS up to $3.15 from $2.76.

Despite the pandemic, we believe the company will continue seeing steady revenue growth, and if  management continues to control expenses successfully, this will raise investor expectations further, driving up the company’s P/E multiple. We believe that Colgate stock can rise around 15% from current levels, to regain its recent high of $86.

While Colgate stock does seem attractive, 2020 has created many pricing discontinuities which can offer further  trading opportunities. For example, you’ll be surprised how the stock valuation for Mondelez International vs Tempur Sealy International shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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