Yahoo Finance Colgate-Palmolive Company's (NYSE:CL) Price In Tune With Earnings
When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 14x, you may consider Colgate-Palmolive Company (NYSE:CL) as a stock to avoid entirely with its 33.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Colgate-Palmolive could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Check out our latest analysis for Colgate-Palmolive
Want the full picture on analyst estimates for the company? Then our free report on Colgate-Palmolive will help you uncover what's on the horizon.
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Colgate-Palmolive's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 27%. This means it has also seen a slide in earnings over the longer-term as EPS is down 15% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% per annum over the next three years. That's shaping up to be materially higher than the 9.1% per year growth forecast for the broader market.
With this information, we can see why Colgate-Palmolive is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Colgate-Palmolive's P/E?
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Colgate-Palmolive's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Colgate-Palmolive that you should be aware of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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