Colgate Gleams as Traders Look for Clean Earnings CheckupJacob Barach
Colgate-Palmolive Co. is drawing bullish speculators as it prepares to report results.
Options that pay off should shares in the world’s biggest toothbrush maker rally 10 percent are priced at the highest relative to bearish contracts since 2011, according to data compiled by Bloomberg. Traders own about 1.7 calls for every put, the most in almost three years.
Colgate is poised to generate faster profit growth as the company, which gets more than half its sales from emerging markets, sees more demand for household goods from mouthwash to dish soap. The New York-based company is scheduled to report quarterly results tomorrow and analysts’ estimates show earnings will rise 11 percent next year, the most since 2010.
“Colgate is a very well-run company,” Constance Maneaty, who covers the company for Toronto-based BMO Capital Markets Corp., said in a phone interview on July 24. “It’s not flashy. It’s really consistent, very methodical and very, very focused.”
The options market is implying a one-day move of 2.2 percent following the earnings report, compared with an average 1.5 percent gain or drop after the last nine earnings announcements, according to data compiled by Bloomberg.
Colgate is projected to earn 73 cents a share in the second quarter, a 4.3 percent increase from the previous year, according to the average analyst estimate compiled by Bloomberg.
Calls betting on a 10 percent gain in Colgate cost 2.3 points less than puts betting on a similar loss, according to data on six-month contracts compiled by Bloomberg. The price relationship reached 1.96 last week, the lowest level since 2011, as rising demand for bullish bets narrowed the spread.
Seven of the 10 most-owned options are calls, with $72.50 contracts expiring next month attracting the highest ownership. The stock has fallen for the past eight days, the longest losing streak in more than two years. It slipped 0.4 percent to close at $66.11 today.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, rose 0.4 percent to 13.33.
Current valuations are too expensive, said Chas Manso De Zuniga, a Paris-based analyst for Societe Generale SA. The stock trades at 23.1 times earnings, near the highest level since 2007, data compiled by Bloomberg show. Procter & Gamble Co. and Kimberly-Clark Corp., which also make basic necessities, have multiples below 20.
“The U.S. market is somewhat saturated,” Ivan Feinseth, chief investment officer at New York-based Tigress Financial Partners LLC, said in a phone interview July 28. “It’s pretty much P&G and Colgate trying to steal market share from one another. There’s not a lot of room.”
Colgate shares slumped earlier this year, along with other U.S. makers of household products with operations in Venezuela, after the country devalued its currency for the fifth time in nine years. The company said in April that it recorded a $174 million charge from the weakening bolivar.
Colgate shares are a good bet because it sells products that people need to buy even when economic growth slows, according to Lauren Lieberman, an analyst at Barclays Plc in New York. The company’s U.S. market share in manual toothbrushes reached a record 41.9 percent and it expanded in mouthwash, dish liquids, liquid cleaners and fabric conditioners, according to a statement in April.
“Colgate stands out as one of the dwindling best-in-class staples names,” Lieberman said in a phone interview on July 24. “When you look across the broader staples landscape, it feels like you have land mines left and right. Top–line growth has been incredibly difficult, emerging markets are decelerating, so with Colgate you’re getting a scarcity value.”