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Colgate-Palmolive May Be a Decent Buy
Posted by: abirk (IP Logged)
Date: June 26, 2014 09:20AM
Colgate-Palmolive Company (CL) is a consumer products company whose products are marketed in over 200 countries and territories throughout the world. It operates in two segments: the Oral, Personal and Home Care segment and the Pet Nutrition segment.
Oral Care business products include Colgate Total, Colgate Sensitive Pro-Relief, Colgate Max Fresh, Colgate Optic White and Colgate Luminous White toothpastes, Colgate 360° manual toothbrushes and Colgate and Colgate Plax mouth rinses. Its Personal Care products also include Palmolive, Softsoap and Sanex brand shower gels, Palmolive, Irish Spring and Protex bar soaps.
Also, the fact that Colgate commands an absolutely incredible 44.3% of the global toothpaste market sets it apart as the best pure-play investment opportunity in the oral-care industry.
Going By the Numbers
The average volume for Colgate-Palmolive has been 3.1 million shares per day over the past 30 days. Colgate-Palmolive has a market cap of $62.1 billion and is part of the consumer goods sector and consumer non-durables industry. The stock has a beta of 0.37 and a short float of 0.9% with 3.42 days to cover.
CL's revenue growth has slightly outpaced the industry average of 1.5%. The same quarter one year prior, revenues slightly increased by 0.2%. The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Household Products industry and the overall market, the company’s return on equity significantly exceeds that of both the industry average and the S&P 500.
Net operating cash flow has slightly increased to $820.00 million or 5.53% when compared to the same quarter last year. In addition, CL has also modestly surpassed the industry average cash flow growth rate of 3.57%. The gross profit margin for CL is rather high; currently it is at 61.09%.
Following its strong first-quarter results, Colgate-Palmolive stated that it expects "another year of strong organic sales growth and gross margin expansion in 2014, and expect diluted earnings per share for the year to grow 4% to 5% on a dollar basis and at a double-digit rate on a currency neutral basis;" this forecast would result in earnings per share in the range of $2.95-$2.98, in-line with analysts' expectations. Also, it is safe to assume that Colgate will generate ample free cash flow during the year, so it can continue to repurchase a substantial amount of its shares while paying its healthy 2.1% dividend.
Tapping the Indian Market
India is known as one of the fastest-growing consumer markets - along with China, Indonesia and Vietnam. India's aggregated consumer spend could reach $13 trillion by 2030. Colgate-Palmolive also sees big growth in its Indian business. The company is the market leader and controls around half of the Indian oral care market. In the third quarter of fiscal 2013, its toothpaste market share rose 80 basis points to reach 54.3% in the Indian market, driven by several premium-priced products such as Colgate Visible White. Its manual toothbrush share also increased by 250 basis points to 42.2% in India, while its regional mouthwash saw market share up by 40 basis points to 20.2%.
The Indian consumer market gives these global consumer products companies huge opportunities for future growth. With established leading positions, Colgate-Palmolive could successfully take advantage of the rise in India's middle class income to drive their global businesses forward.
Colgate is pursuing a funding-the-growth initiative that is helping it to generate savings on indirect purchases by negotiating better lease terms with its current suppliers in several countries. It is also generating significant cost savings in a number of ways that include raw material substitution, the reduction of packaging material, and the increase in manufacturing efficiency through reductions in the number of stock keeping units (SKUs). All of these cost savings initiatives are and will continue helping the company offset commodity headwinds and reinvest cash flows in building its products particularly through increased advertising.
The restructuring program will begin delivering its value next year. 2015 will see substantial savings when the process is completed and cash flows will increase and will range between $365 to $435 million pre-tax ($275 to $325 million after-tax) per annum. These savings will provide bottom line growth helping investors realize greater returns.
The company has earned its brand name recognition that has allowed it to occupy shelf space in the bathrooms of most Americans: you may not think of toothpaste as an innovative industry, but Colgate is currently breaking ground on an anti-cavity toothpaste that uses remineralization techniques to neutralize the sugar deposits in teeth and be 4x as effective as the typical fluoride.
Demand for household and personal care products is generally stable and not affected by changes in the economy. About 80% of CL's sales come from outside the U.S., with over 50% from emerging markets. Long-term CL's stringent focus on cost management will help it to manage through future competitive challenges.
Colgate-Palmolive has one of the most recession-resistant portfolio of products of all consumer goods companies. The most attractive feature of Colgate-Palmolive is its portfolio of products. The company's products are so basic and intimate that even during a recession consumers are hesitant to switch them out like they might with other lower-priced frequently private label offerings within other segments of consumer goods.
Stocks Discussed: CL,