This Large Cap Stock Could Deliver a 117% Gain
Business Wire reported on the earnings of Colgate-Palmolive Company (NYSE:CL). The company reported worldwide net sales of $4,015 million in fourth quarter 2019, an increase of 5.5% versus fourth quarter 2018. Global unit volume increased 5.5%, pricing increased 1.5% and foreign exchange was negative 1.5%.
The stock was up on the news.
The previously disclosed acquisition of the Laboratoires Filorga Cosmétiques skin health business contributed 2.0% to Net sales and unit volume growth in the quarter. Organic sales (Net sales excluding the impact of foreign exchange, acquisitions and divestments) increased 5.0%.
Insurance For Your Investments? The Answer...Options
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Net income and Diluted earnings per share in fourth quarter 2019 were $643 million and $0.75, respectively.
Net income in fourth quarter 2019 included $27 million ($0.03 per diluted share) of after tax charges resulting from the Company’s Global Growth and Efficiency Program, $6 million ($0.01 per diluted share) of after tax acquisition-related costs, a $20 million ($0.02 per diluted share) after tax benefit related to a value added tax matter in Brazil and a $29 million ($0.04 per diluted share) tax benefit related to Swiss income tax reform.
Net income and Diluted earnings per share in fourth quarter 2018 were $606 million and $0.70, respectively. Net income in fourth quarter 2018 included $32 million ($0.04 per diluted share) of after-tax charges resulting from the Global Growth and Efficiency Program.
Gross profit margin was 60.1% in fourth quarter 2019 versus 59.1% in fourth quarter 2018. Excluding charges resulting from the Global Growth and Efficiency Program in both periods and acquisition-related costs in 2019,
Gross profit margin was 60.2% in fourth quarter 2019, an increase of 80 basis points versus the year ago quarter as cost savings from the Company’s funding-the-growth initiatives and higher pricing were partially offset by higher raw and packaging material costs. Mix, primarily Filorga, was also favorable.
Operating profit increased to $931 million in fourth quarter 2019 compared to $891 million in fourth quarter 2018. Excluding charges resulting from the Global Growth and Efficiency Program in both periods and acquisition-related costs and the benefit related to the value-added tax matter in Brazil in 2019, Operating profit was $938 million in fourth quarter 2019, even with fourth quarter 2018.
Operating profit margin was 23.2% in fourth quarter 2019 versus 23.4% in fourth quarter 2018.
Net cash provided by operations year to date was $3,133 million compared to $3,056 million in the comparable 2018 period. Working capital as a percentage of Net sales was negative 1.6% compared to negative 1.7% in the year ago period.
Noel Wallace, President and Chief Executive Officer, commented on the fourth quarter results,
“We are very pleased to have ended 2019 with another quarter of sequential improvement in net sales growth and organic sales growth. It is especially encouraging that the strong 5.0% organic sales growth was broad-based, with every operating division contributing to the growth.
“We remain sharply focused on sustaining this growth momentum by continuing to innovate in our core businesses, pursue adjacent categories and expand into new markets and channels. We also continue to invest behind our brands, with our advertising investment increasing this quarter in absolute dollars and as a percent to sales versus fourth quarter 2018.
“Colgates leadership of the global toothpaste market continued during the quarter with our global market share at 41.1% year to date. Our global leadership in manual toothbrushes also continued with Colgates global market share in that category at 31.6% year to date.”
Mr. Wallace continued, “As we look ahead to 2020, based on current spot rates, we expect 4% to 6% net sales growth and 3% to 5% organic sales growth. This growth reflects our plan to continue to invest behind our brands and our global capabilities.
“We are also excited about expanding our oral care portfolio with the recent announcement of our agreement to acquire Hello Products LLC, one of the fastest-growing, premium oral care brands in the United States. Our guidance includes this acquisition.
“On a GAAP basis, based on current spot rates, we are planning for a year of gross margin expansion, increased advertising investment and a mid to high-single-digit increase in earnings per share.
“Excluding charges resulting from the Global Growth and Efficiency Program, acquisition-related costs and the benefits from the value-added tax matter in Brazil and Swiss income tax reform in 2019, based on current spot rates, we are planning for a year of gross margin expansion, increased advertising investment and a low to mid-single-digit increase in earnings per share.”
This news could indicate more gains are in store as the stock completes a large consolidation pattern.
A Trade for Short Term Bulls
As with the ownership of any stock, buying CL could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for CL
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For CL, the February 21 options allow a trader to gain exposure to the stock.
A February 21 $74 call option can be bought for about $1.05 and the February 21 $76 call could be sold for about $0.42. This trade would cost $0.63 to open, or $63 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $63.
The maximum gain on the trade in CL is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in CL the maximum gain is $1.37 ($76 – $74= $2; $2 – $0.63 = $1.37). This represents $137 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $63 to open this trade.
That is a potential gain of about 117% in CL, based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.