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Margaret Moran
Margaret Moran
Articles (385) 

Colgate-Palmolive: 3rd-Quarter Win Reflects Strength of Growth Strategy

The household staples company beat earnings expectations on solid organic growth

October 30, 2020 | About:

On Oct. 30 before the market opened, Colgate-Palmolive Co. (NYSE:CL) reported earnings results for the third quarter of 2020.

The company surpassed analyst expectations on significant year-over-year earnings and revenue growth. Shares gained more than 2.5% throughout the day to trade around $78.75 following the news.

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Overview of the quarter

The company's revenue for the quarter was $4.15 billion, a 5.5% increase compared to the same quarter of 2019. Meanwhile, diluted earnings per share came in at 81 cents compared to 67 cents in the prior-year quarter. Wall Street had been expecting revenue of $3.98 billion and earnings of 70 cents per share.

The gross profit margin increased 220 basis points to 61.2%. According to President and CEO Noel Wallace, "The very strong gross margin expansion in the quarter allowed us to invest more behind our brands and provides us with the ability to increase that investment in the balance of the year in support of a very full innovation pipeline."

By region, North America sales represented 22% of revenue, with the highest organic growth coming from the company's home turf in the U.S. Year to date, the company claims 35% of the market share for toothpaste and 40% of the market share for manual toothbrushes in the U.S. Latin America, which represents 20% of revenue, saw growth in Brazil, Argentina, Mexico and Colombia. Europe, which provides 17% of revenue, grew in France, the Netherlands and Denmark but declined in the U.K. The company's other segments – Asia Pacific (18%), Africa/Eurasia (6%) and Hill's Pet Nutrition (17)% - had mixed results.

The company's "Base Business" saw earnings per share grow from 71 cents in the prior-year quarter to 79 cents in the recent quarter, which reflects 11% growth versus diluted earnings per share growth of 21%. The Base Business consists of the business minus the following: "charges and benefits from its Global Growth and Efficiency Program, a charge related to U.S. tax reform, acquisition-related costs and a benefit related to a recent reorganization of the ownership structure of certain foreign subsidiaries and a new operating structure being implemented within one of the Company's divisions." All factors considered, it seems that the company's global growth and restructuring initiatives are adding significant value (the effective tax rate only increased 2% from last year to a total of 23%).

In terms of the balance sheet strength, the company made $3.26 billion in principal payments of debt during the quarter and issued $2.50 billion in new debt, which was better than the $4.18 billion in principal payments and $6 billion of new debt issued in the third quarter of 2019. Colgate-Palmolive ended the quarter with $7.23 billion in debt, an improvement compared to the $8.15 billion worth of debt on its balance sheet at the same time last year.

Meanwhile, cash and cash equivalents were mostly the same at $989 million compared to last year's $948 million. Total assets were much the same at $15.46 billion versus last year's $15.02 billion.

Looking forward

The company did not provide guidance numbers. However, Wallace did make the following comments regarding the company's future:

"It is rewarding to see the growth strategies we are implementing bear fruit. While we continue to see elevated demand in personal care and home care related to the virus, premium innovation is also driving growth across all of our product categories. We also continue to see strength in eCommerce, led by our Hill's business.

Looking ahead, while uncertainty related to the impact of the pandemic still exists, including macroeconomic impacts and government actions to stem the virus, we believe we have better visibility for the balance of the year and therefore we are providing annual financial guidance for 2020."

At a price-earnings ratio of 26.19, the company is more expensive than many of its competitors and slightly above its own historical median of price-earnings ratio of 25.53. The GuruFocus Value chart rates the stock as "fairly valued."

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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