Don't Brush Off An Opportunity To Buy Colgate-Palmolive Right Now

Morgan Stanley said in a note, with Colgate-Palmolive Company CL, it sees a rare opportunity to buy a well-positioned business at valuation level close to structurally less attractive peers. The firm noted that the stock of the company has underperformed due to its transitory top-line slowdown compared to peers.

As such, the firm upgraded shares of Colgate-Palmolive to Outperform and bumped up its price target from $75 to $84.

At the time of writing, shares of Colgate-Palmolive were surging up 3.54 percent to $73.71.

Analyst Dara Mohsenian termed Colgate-Palmolive as Morgan Stanley's top household products pick. At the same time, the analyst noted in the firm's recent investor survey, the company scored the lowest on sentiment among its mega-cap staples names.

The analyst clarified that the pessimism toward the company stemmed from the company disappointing on its organic sales growth for three straight quarters and sub-par earnings per share quality after years of moderating ad spend.

See also: Benzinga's Top Upgrades, Downgrades For September 25, 2017

Morgan Stanley thinks the market views the company as an average mega-cap, with valuation close to peer levels after nearly 600 bps of relative multiple compression since the end of May.

However, the firm's analytical work pointed toward a significant top-line growth inflection, beginning in the fourth quarter. The firm believes top-line upside and favorable forex would help to drive earnings per share upside relative to the consensus, catalyzing multiple expansion.

"Our new $84 PT is based on ~24.5x times our upwardly revised FY19 EPS estimate (~23xex a 7.5% strategic halo), representing a ~20% return with a ~2% dividend yield," the firm said.

"Furthermore, we see a 2:1 ratio of bull case upside relative to bear case downside."

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