Morgan Stanley Shifts To Neutral On Colgate-Palmolive, Cites Emerging Markets Weakness

General skepticism surrounding the household and personal care industry, weakening fundamentals at Colgate-Palmolive Company (NYSE: 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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