Colgate's Growth Story Is Not Over

Nov.19.13 | About: Colgate-Palmolive Co. (CL)

A company with lower dividend yields and higher P/E and P/Cash flow ratios than the industry average and a PEG ratio of 2.9 means that the stock is highly overvalued and it would be unwise to invest money in that stock. However, we should bear in mind that these are not the only parameters used to evaluate a stock's value. There are many other indicators that play a major role in the stock's valuation and could enhance its attractiveness even with the poor indicators mentioned above.

Colgate-Palmolive Company (NYSE:CL), a global leader in the oral and personal care industry, has a dividend yield of 2% compared to the industry average of 2.8% and a PEG ratio of 2.9. However, the company's stock received a price hike from Credit Suisse to $72, which from a recent $65.39, provides it with an upside potential of more than 10%.

In this article I will analyze the reasons behind Colgate's success and determine what makes it a tempting opportunity for investors.

Strengthening Fundamentals

The company operates in two segments: oral, personal, and home care and pet nutrition. Its major revenues come from its oral, personal and home care segment. Approximately 80% of its net sales are generated from markets outside the U.S., with over 50% of its net sales coming from emerging markets.

In the third quarter of 2013 the company's worldwide net sales were $4,398 million, up 1.5% from the third quarter of 2012 due to a 5% volume growth and a 1% increase in net selling price. The organic sales increased by 6%. The company has achieved its highest volume growth in this quarter since 2008. In the last two quarters the volume growth was 4.5% whereas in 2010 the growth was 3%, in 2011 the growth was 4% and in 2012 the growth was 3.5%.

In its oral, personal and home care segment Colgate experienced the highest YoY sales growth of 7.5% in the Asian region, a growth of 2% the in African region, 1% growth in the North American region and a 1.5% growth in the Europe/South Pacific region. The company only experienced a nets sales growth decline in the Latin American region of 2%. However, the company could not meet Wall Street's expectations for this quarter.

The gross profit margin in the third quarter of 2013 improved by 40 basis points to 58.8% and the operating profit margin remained flat YoY after excluding one-time expenses. This quarter the gross margin reached its highest level since 2010.

The operating margin increased as a result of the company's restructuring program but it was offset by an increase in selling, general and administrative expenses due to an increase in advertising investments. However, the advertising investment helped the company to boost its sales. The company sacrificed its margin to protect its market share from emerging rivals. Excluding one-time costs, the net earnings increased by 3% compared to 3Q12. The Company's per share earnings were $0.7 as compared to $0.68 last year.

The company has started a global growth and efficiency program to streamline its cost structure and further invest in growth opportunities. During the four years that the program will be in effect, (2013 to 2016) the company intends to expand its commercial hubs, optimize its global supply chain and facilities, extend shared business services and streamline global functions.

It is expected that the target savings will be in the range of $275MM -$325MM annually, after-tax, by the fourth year of the program with a rate of return greater than 30%. The results of this program are already apparent as many have noted an improvement in the company's margins during the third quarter of 2013.

Growing Market Shares

Colgate is the global market leader in toothpaste and manual toothbrushes. During the third quarter of 2013, its YTD share in the global toothpaste market was 45% and its share in the manual toothbrushes segment was 33.4%.

The charts below show Colgate's market share up until the second quarter of 2013. There is little change in the company's share during the third quarter of 2013 compared to the previous quarter. The charts clearly show that Colgate is well positioned in these two markets and faces no significant threat from any of its competitors in the near future.

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Source: Company's Presentation

Colgate is the second largest player in the global mouthwash market.

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Rising population levels, increased awareness about oral and personal hygiene and increasing product innovations in these market segments are expected to boost the oral and personal care market revenues in the future. The saturated American market may face a decline but the demand in the emerging markets is expected to grow significantly.

The increase in demand would considerably improve the company's earnings since its major revenues come from the emerging markets. Moreover, as the company attains the larger shares in the market an increase in demand would prove to be a huge benefit.

Colgate is also focusing on improving its execution on the ground. As a result of this approach, the company is directly reaching out to small local stores in rural India. India's market rate is expected to grow at a much higher rate than the global growth rate and only 42% of its rural population uses toothpaste. This coverage strategy would definitely expand Colgate's share in the Indian market and defend Colgate's network from Oral-Bits newest rival entered in the market.


To protect its market share, cater to the needs of consumers in different geographical regions and to expand its revenue base the company is focusing on developing new and innovative products. In the Indian market, Colgate has launched innovative products such as Colgate Total Pro Gum Health and Colgate Sensitive which will help it compete with Oral-B Pro-Health, the emerging rival from P&G.

Since 5.4 billion of the world's population still suffers from tooth decay the company has launched Colgate maximum cavity protection plus sugar acid neutralizer. The product is twice as effective as fluoride alone.

The company has also launched Colgate Sensitive Smart Foam with whitening in Turkey, Colgate Luminous White Enamel Shine and Colgate Plax 2 in 1 in Brazil, Colgate Total Pro-Interdental in Europe, and Colgate Slim Soft Charcoal Toothbrush in Asia.

Investors Earnings

Although the company's dividend yield is below the industry's average its price chart shows that the company's stock price appreciated by 24.6% in the last year. Currently, the price reached its highest level so the investors can earn profits through this appreciation.

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Source: Morningstar

The company also has a strong dividend paying policy. The chart below shows that for the last 50 years, the dividends paid to investors have continuously increased even in during recessionary period. Also, the company has never defaulted.

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Final Thoughts

With the largest market share in the global market, well-positioned brands, high demand for its products in the emerging markets, an effective restructuring program and great ideas to cater to the consumers' needs, Colgate is expected to earn even higher profits in the future.

The company is also distributing these profits to the investors in the form of price appreciation and constantly increasing dividends. Together these compensate for the lower than industry dividend yield and higher PEG ratio. Moreover, the company's forward P/E is expected to be 21.2 compared to the trailing P/E of 25.3. In my opinion the company's stock definitely has an upside potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by APEX Financial Consultants. This article was written by one of our research analysts. APEX Financial Consultants is not receiving compensation for this article (other than from Seeking Alpha). APEX Financial Consultants has no business relationship with any company whose stock is mentioned in this article.