Morgan Stanley upgrades Colgate-Palmolive, calls sell-off a good entry point to buy its top pick

Published Mon, Jan 30 20236:37 AM ESTUpdated Mon, Jul 24 202310:33 AM EDT

Colgate-Palmolive is a top stock compared with peers and it's cheap to buy right now, Morgan Stanley said. Analyst Dara Mohsenian upgraded the stock to overweight from equal weight and named it his top pick in the household and personal care industry. His price target of $82 implies 14.5% upside from Friday's close. The stock advanced 1.4% in Monday premarket trading following the call. Mohsenian said it's attractive because of the recent 10% drop — a chunk of which came from a sell-off on Friday — that's created "a buying opportunity into a structurally attractive name" that should beat expectations going forward despite a less-than-ideal fourth quarter. "Robust LT organic sales growth [is] not fully reflected in discounted valuation vs peers, and clearly conservative CY23 EPS guidance, that should enable CL to beat lowered forward consensus forecasts," Mohsenian said in a note to clients Monday. CL YTD mountain Colgate shares this year Colgate-Palmolive is down 9.1% this year despite the broader market's rebound as investors shun defensive stocks. It was able to avoid some of 2022's sell-off, finishing down 7.7% compared with the S & P 500 's 19% fall. Mohsenian pointed to the company's larger-than-expected fourth-quarter gross margin miss and weaker-than-anticipated 2023 earnings guidance reported Friday as drivers of the most recent sell-off. But he said that fourth-quarter miss was due more to "transitory factors." Overall, he said the company has strong top-line growth potential coming out of the pandemic. He said expectations from the company for 2023 are "overly conservative." He also noted that Colgate-Palmolive typically outperforms its expectations for earnings as evidence the company is setting its expectations for the year ahead too low. The stock has been somewhat supported as of late by speculation the company could get pressure from shareholders to separate its pet business, Mohsenian said. The analyst sees this as unlikely, but said the recent success of the business unit can provide a cushion in a downside scenario and increase pressure on management to improve shareholder value. Mohsenian said the stock has an attractive valuation, trading at a lower price-to-earnings ratio when looking ahead to 2024 compared with peers. — CNBC's Michael Bloom contributed to this report.