For Now It’s Best to Avoid Colgate-Palmolive Company Stock

Even with rising income, its no-moat status will likely hurt CL long term

CL stock - For Now It’s Best to Avoid Colgate-Palmolive Company Stock

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The relative decline of Colgate-Palmolive Company (NYSE:CL) and its peers appears to have paused. Wall Street shrugged off news about the recall of Colgate’s Orabase and competing products. Now, Wall Street analysts have turned bullish on CL stock, as profit growth seems to have returned.

However, the no-moat status of Colgate-Palmolive remains and new competitors pose a serious threat to its core business. For this reason, I believe CL stock remains in danger despite its stability and consumer following.

CL Stock Sees Revenues, Net Income Again on the Rise

To be sure, the outlook for CL stock has shown improvement. As a result, an analyst upgrade from Argus sent the stock higher in Friday trading. Argus set its current price target on CL at $72 per share. This would amount to about a 12% increase from today’s levels.

Due to the declines, the forward price-to-earnings (PE) ratio of the stock now stands below 20. Regarding historical PE ratios, this brings CL stock back to the PE ratios seen during the depths of the 2007-09 financial crisis. As a consumer defensive, CL stock and its peers experience relatively few negative effects from economic downturns. However, it also means that Colgate trades at half the multiple it saw in 2016.

Moreover, Wall Street believes the company will resume revenue growth over the next two fiscal years. This revenue growth should also bring sustained profit growth. Analysts predict profit growth in the mid- to high-single digits in each of the next three fiscal years.

Regarding dividends, CL stock stands as one of the current 53 dividend aristocrats trading on the market today. Colgate has increased its dividend every year since 1964 and has paid dividends for over 100 years. Those who buy today will receive a dividend of 42 cents per share every quarter. That amounts to a dividend yield of about 2.6%. With growing profits and a long tradition of dividend increases, dividend growth is almost certain to continue.

Competitive Threats Remain for CL Stock

Despite these positives, I still think investors should remain cautious on Colgate stock and the sector as a whole. Although the outlook has recently improved, this sector saw several years of revenue declines. As a result, CL stock trades at levels last seen in 2014.

The trends that have caused these declines remain and will likely intensify. Products such as Colgate toothpaste or Palmolive dishwashing liquid are highly commoditized products that peers can easily copy. Hence, name recognition and control of shelf space constitute their moat. This also holds true for peers such as Procter & Gamble Co (NYSE:PG), Kimberly Clark Corp (NYSE:KMB), and Unilever NV ADR (ADR) (NYSE:UN).

Today, Amazon.com, Inc. (NASDAQ:AMZN) and other e-commerce players have changed the competitive landscape. Now, smaller manufacturers can gain exposure and occupy virtual shelf space online. This ends a de facto monopoly on shelf space the large companies enjoyed for decades. It also opens up the market to niche products that could attract consumers for eco-friendliness, being artisan-made, or any other designation that makes products stand out. In light of this threat, Colgate and Palmolive products have seen little change.

I do not predict a widespread abandonment of Colgate’s and Palmolive’s familiar products. However, I think the wide availability of different products could harm CL’s growth potential long term. Though I like the dividend and the stability, I do not think investors should pay 20 times earnings for what stands as a no-moat business.

The Bottom Line on CL Stock

Despite recent improvements, CL stock remains in danger from its increased competitive threat. The recent improvements in revenues and earnings, as well as one of the most stable dividends in the world, could attract investors.

However, these same investors need to realize that the limited moat enjoyed by the large consumer defensive names has now disappeared. As smaller producers attract customers by appealing to emotional hot buttons, Colgate, Palmolive and the consumer products of other large peers have seen little change.

Colgate still enjoys a loyal customer base. Most customers will remain and the company has time to adapt to the changing market. However, without any moat, 20 times earnings remains too high of a price to pay.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

 


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