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A Personal Care Giant That Knows Where It’s Going
Posted by: Patricio Kehoe (IP Logged)
Date: January 29, 2014 02:19PM

​In the personal care industry, product innovation, international presence and consumer loyalty are key factors for any company willing to sustain its market position. The Colgate-Palmolive Company (CL) is a firm that has united all of these aspects for the past 200 years and has grown to be one the world’s largest consumer product companies. Its product portfolio comprises a combination of toothpastes, detergents, shampoos, shower gels, deodorants and shaving products, which are sold in 225 countries. In addition to these traditional products, the firm also owns specialty pet food maker Hill’s, which sells its products via veterinarians and pet retailers. So, let’s see why investment gurus Joel Greenblatt (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) are so keen on owing shares in this company.

A Necessary Quality Product

Colgate-Palmolive has been the number one quality personal care product manufacturer for two centuries, and as such, has managed to obtain substantial competitive advantages in the long term. This company’s international customer loyalty and strong relationship with orthodontic practices has ensured it a vast economy of scale. With 80% of sales deriving from international markets, and 50% from fast-growing emerging nations, this company’s brands enjoy considerable customer loyalty. In fact, the Colgate brand holds 46% of the global toothpaste market share, and 50% of India’s market, 70% in Brazil and 30% in China. The intimate nature of the firm’s products also makes these recession-proof, since consumers are not likely to switch out their quality personal care products for cheaper versions, even in a case of lower discretionary spending.

Although the Hill’s pet nutrition business segment (13% of sales) has struggled to keep up with the other brands’ profit margins, the firm is counterbalancing it with new product launches and business acquisitions. In 2011, for example, Colgate-Palmolive bought Unilever N.V. (ADR) (UN)’s personal care unit Sanex and divested its laundry detergent business in Columbia, in order to achieve long-term profitability through additional segments. The recent alliance with Omron Healthcare will also help the company achieve product innovation to drive top-line growth. In addition to this, the company also benefits from its size and scale, which enables it to realize a lower unit cost than competitors like The Procter & Gamble Company (PG), resulting in a cost advantage and wide economic moat.

Strategic Initiatives

Despite the personal care giant's past success and $17.1 billion revenue, with a steady 6.8% growth rate, Colgate-Palmolive is looking to augment its unit volume growth and organic sales, as well as improve its manufacturing efficiencies. Therefore, in 2012, the company announced its four-year restructuring program, which will generate cost savings of $365 million to $435 million annually and reduce the workforce by nearly 8% come 2016. The additional free cash will contribute to enhancing the already healthy cash return to shareholders, from which investors will undoubtedly benefit. In fact, fiscal 2013 had Colgate-Palmolive repurchasing shares worth $1.115 million and paying a total dividend of $1.03 billion, a profitable trend which is bound to continue, given the current 2.2% dividend yield.

The firm’s dependency on international sales could be detrimental to some extent, given the foreign currency swings and local competition present in emerging markets. Venezuela’s currency devaluation in 2010, for example, weighed heavily on that year’s results, and the firm had to pay a $271 million charge against operating profits, a scenario which may repeat itself in 2014. Market competition and high cost inflation are also factors to be taken into account. Nevertheless, given the firm’s operating margin growth predictions for 2022, which will bump 4 points to 26%, I feel bullish that this personal care giant will maneuver headwinds without major issues and maintain its position as one of the industry leaders.   

 Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: PG, UN, CL,
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