Colgate-Palmolive stock (NYSE: CL) has gained 40% in value since early January 2023 – jumping from levels of around $75 then to over $105 now – vs. an increase of about 45% for the S&P 500 over this period. This can primarily be attributed to a 26% rise in the stock’s P/S ratio from 3.5x revenues in 2022 to 4.4x revenues now. Furthermore, the company’s sales grew 11% from $18 billion to $20 billion over the same period. Investors have rewarded CL stock thanks to the uptick in its operating margin. Our dashboard on Why Colgate-Palmolive Stock Moved has more details.
The increase in CL stock over the recent years has been far from consistent, although annual returns were considerably less volatile than the S&P 500. Returns for the stock were 2% in 2021, -5% in 2022, and 4% in 2023, compared to 27%, -19%, and 24% returns for the S&P500 index, respectively. This indicates that CL underperformed the S&P in 2021 and 2023.
In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could CL face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a strong jump? We estimate Colgate-Palmolive’s Valuation to be $101 per share, slightly below its current market price of $106. Our forecast is based on 4.1x forward expected revenues of $25 per share. The 4.1x figure is slightly higher than the stock’s average forward P/S ratio of 3.7x seen over the last four years. We think a slight rise in valuation multiple seems justified, given the company’s improving profitability, as discussed below.
Colgate-Palmolive’s revenues are reported under two segments – Oral, Personal, & Home Care, and Hill’s Pet Nutrition. These segments accounted for 78% and 22% of the total sales in 2023, respectively. Our dashboard – Colgate-Palmolive Revenues: How Does Colgate-Palmolive Make Money – has more details on the company’s segments. Much of the sales growth lately is being led by better price realization, while volume growth has been slow. For the six-month period ending June 2024, the organic revenue growth of 9.4% was driven by 6.3% growth in pricing and a 3% rise in volumes. Looking forward, the company expects its organic sales growth to be between 6% and 8% for the full-year 2024.
Not only has the company seen its revenue rise lately, it has seen its operating margin expand from 20.1% in 2022 to 21.7% in the last twelve months. For the six-month period ending June 2024, the operating margin expanded 150 bps y-o-y to 21.1%. The growth in gross margin was even more profound, up 300 bps y-o-y. The company has delivered gross margin expansion in each of the last four quarters, implying an efficient production cost management.
Overall, Colgate-Palmolive is poised to deliver mid-single-digit average annual top-line growth over the next three years. Investors have rewarded the stock with a higher valuation multiple, but is it worth picking now? We don’t think so. We believe that the positives around the improved profitability are already priced in, while slow volume growth remains a near-term risk factor. As such, investors willing to pick CL will likely be better off waiting for a dip.
While CL stock looks appropriately priced, it is helpful to see how Colgate-Palmolive’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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