Colgate-Palmolive: Avoid Despite The Drop

Summary

• Shares in CL are down 9% since I advised against buying two months ago.
• CL is now trading near its 52-week low.
• The company's valuation metrics are now near their 5-year averages.
• Still, interest and foreign exchange rate risks mean I still don't see CL as a buy.

When I last looked into Colgate-Palmolive (NYSE:CL), shares in the company were trading at $75.42, which was quite close to the 52-week high. At the time, I decided against buying shares in the company. If you'd like to read my most recent article on CL, you can find it here.

However, a lot has changed over the past two months. Shares in CL have made a significant drop after the company's most recent earnings report and are now trading at $69.27 which is less than 2% above the 52-week low of $68.19. As we can see from the graph below, this is the first opportunity in about a year to buy CL near its 52-week low.

CL data by YCharts

So, what was it about CL's earnings report that send the stock downwards, and does this present us with a good entry point?

Revenues in the fourth quarter increased by 4.6% compared to the same quarter last year. At first glance, one might be tempted to think this is great for a company the size of CL, but analysts had actually forecasted revenues to be $40 million higher.

A 4.6% increase in sales isn't too bad. In fact, it might be a reason for me to consider starting a position, if it wasn't for the fact CL's sales increase is mostly due to a depreciating dollar, rather than by selling more products.

This effect is especially visible when we look at CL's results in Europe, where the company gets 16% of its sales. Here, CL's revenues grew by 13% compared to the same quarter last year, despite pricing decreasing by 2%. However, sales volume grew by only 6%, with a 9% positive impact from currency exchange rates.

Operating profit for the European part of the company was up by 7%, which is great. However, keep in mind that if we deduct the currency exchange rate effects, operating profit was actually down. Other regions show a similar pattern, though not as extreme as in Europe.

Roughly 75% of Colgate's sales are from outside of the United States meaning the company is exposed to quite a bit of currency risk. To make matters worse, CL has a rather large, and growing, amount of long term debt. Fluctuations in foreign exchange rates mean the amount of dollars the company gets will also fluctuate, while costs for interest and dividends remain the same.

CL Total Long Term Debt (Quarterly) data by YCharts

Looking at CL's valuation metrics we can see the company is trading near its 5-year averages, with a P/E ratio of 30.4 compared to a 5 year average of 30.5. The price to cash flow ratio currently stands at 20.1 (5-year average is 20.4). The price to sales ratio is a bit above the company's 5-year average, at 4.0.

Colgate-Palmolive doesn't appear to be as overvalued as it was two months ago. The recent drop to close to the 52-week high might be a reason for investors to get in. The dividend yield still isn't extremely high, at 2.3%, and not likely to increase by much this year, as can be read in this article by Aristofanis Papadatos.

Furthermore, CL's large amount of sales outside of the US and its long term debt of over $6 billion means the company buying CL is basically a bet on a weak dollar and low interest rates. Despite the drop in share price, I don't believe the potential gains to be worth the risk. I'll be steering clear of CL for now.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.