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Colgate-Palmolive May Prove to Be a Good Buy

April 25, 2014 | About:
abirk

abirk

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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.

Performance So Far

Colgate-Palmolive, the world's largest toothpaste maker, reported a better-than-expected quarterly profit as cost cuts offset the negative impact of a stronger dollar. Colgate's gross margins rose in the fourth quarter as it cut costs by negotiating better lease terms with suppliers, using cheaper raw material and reducing packaging material in products.

Launch of higher-margin products, redesigning of some brands and introduction of successful regional products in other markets helped the company grow its sales. Colgate, which controls about 45 percent of the global toothpaste market, said it expected its 2014 adjusted earnings to be in line with analysts' estimates. Gross margins are expected to increase by 75 to 125 basis points. The company reported gross margins of 58.6% for 2013.

Organic revenue in Asia, including India and China, grew 9% due to higher sales of products such as Darlie Expert White toothpastes and Palmolive Naturals White + Milk bar soap. The company said its global volumes grew 6.5%. The company earned 75 cents per share, excluding a $133 million aftertax charge related to restructuring. Revenue rose 2% to $4.36 billion. The gross profit margins rose to 58.9% in the fourth quarter from 58.4% a year earlier.

Colgate-Palmolive has performed well over the past five years, with EBITDA expanding each and every year.The company's revenue contracted only once slightly in 2009. In spite of the one-year contraction, the company managed a positive compounded annual growth rate of 2.7% over the past four years.

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.

RestructuringProgram

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.

To End

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.


Rating: 3.0/5 (3 votes)

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Comments

kfh227
Kfh227 premium member - 6 months ago

The market cap is way to high given the FCF.

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