Morgan Stanley: Colgate-Palmolive’s third-quarter gross margin beats expectations, but North American recovery remains key

Why did third-quarter earnings beat expectations?

Adjusted earnings per share in the third quarter of 2026 were $0.97, above the market consensus of $0.93; organic sales grew 3.6%, slightly above the consensus of 3.3%.
Gross margin rose 90 basis points year over year, exceeding market expectations. Productivity improvements contributed 290 basis points, largely offsetting a 300-basis-point drag from higher raw material costs; pricing and product mix contributed 80 and 20 basis points, respectively. There was no benefit from tariff refunds during the quarter.
The company consequently raised its full-year 2026 gross margin guidance from “roughly flat” year over year to “growth.” Its guidance for adjusted earnings per share growth is 5%–7%, with the midpoint approximately 1 percentage point higher than before; full-year organic sales growth is expected to be in line with the approximately 3% recorded in the first three quarters.

Emerging markets, which account for approximately 45% of company sales, posted organic sales growth of 5.4% in the third quarter. Latin America grew 6%, with volume up 3.9% and pricing contributing 2.1%; however, product formulation issues in the prior-year period created a low comparison base, and Mexico was also relatively weak.
Hill’s pet nutrition business, which accounts for approximately 22% of sales, posted organic sales growth of 5.7%, above the market consensus of 4.1%; exiting the private-label business was a drag of 0.7 percentage points. Volume and mix grew 1.8%, while pricing contributed 3.9%.
Gross margin expansion at Hill’s supported greater advertising investment, but the advertising expense ratio rose 290 basis points year over year, the main reason for the business’s 15-basis-point decline in operating margin. Global toothpaste share rose 20 basis points year over year in the third quarter.

The North America segment, excluding pet nutrition, accounts for approximately 17% of sales. Its third-quarter organic sales fell 1.6% year over year, an improvement from the 2.6% decline in the first half; volume and mix fell 3.7% during the quarter, offsetting the 2.2% contribution from pricing.
Morgan Stanley believes the company’s new product innovation in 2026 fell short of expectations. The company plans to accelerate premium product launches and strengthen its core brands over the next few quarters, and expects a stronger innovation cycle in 2027.
The bank’s view of North America in 2027 has improved, based on a lower comparison base, the new regional leader’s prior experience in Europe, and a recent recovery in US retail scanner data.

Morgan Stanley raised its 2026 earnings-per-share forecast by approximately 2% because of the third-quarter gross margin performance, but lowered its 2027 forecast by 0.5% because of weaker exchange rates and continued raw material cost pressure. It expects earnings per share to grow approximately 5% that year.
The company expects raw material cost pressure to peak for the year in the fourth quarter of 2026; Morgan Stanley believes the cost outlook for resin, petrochemicals, pulp and paper remains volatile.
The bank maintained its Overweight rating and raised its price target from $104 to $111, based on a price-to-earnings multiple of 25 times forecast 2028 earnings per share. Its long-term view is that pricing power and share gains in emerging markets, Hill’s and oral care can support sustained organic sales growth of 3%–4%.