General skepticism surrounding the household and personal care industry, weakening fundamentals at Colgate-Palmolive Company CL and valuation have made Morgan Stanley cautious on the stock.
The Analyst
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.
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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