Colgate: A Long-Term Investment

| About: Colgate-Palmolive Co. (CL)

Increased awareness concerning oral and personal hygiene products, especially in the developing regions, has increased the revenues of the personal care products market. This was evident from Colgate-Palmolive (NYSE:CL) latest earnings results. The company's fourth-quarter net revenues inched up 1.76% on a YoY basis. The net revenues in this quarter reached $4.36 billion. However, the company could not beat analysts' estimates of $4.38 billion due to flat pricing and the negative impact of foreign exchange.

The revenues growth was supported by the company's continuous expansion in the Asian market. Colgate's successful launches in Asia contributed to volume growth throughout the region. The region's unit volume grew 10.5% and organic sales increased 9%. The net sales in the region rose 4.5% YoY. Volume gains in Asia were primarily led by China, India, and the Philippines.

The market with the second strongest YoY growth after the Asian market was North America, where the company's unit volume rose 4% during the quarter. Like the Asian market, new product launches in this region contributed to the company's volume growth. The region's organic sales climbed 3% whereas net sales increased 2.5%.

The unit volume growth in the Latin American region was the strongest among all the regions but this growth was partially offset by the significant impact of negative foreign exchange. The net sales growth in the region was only 1% during the quarter. Likewise in the Africa/Eurasia region, the positive impact of higher volume growth was offset by a greater negative currency exchange. The net sales growth in the region was only 0.5% during the fourth quarter of 2013.

The only region in which Colgate experienced negative net sales growth was the Europe/South Pacific region. Although the foreign exchange impact was positive in this region, the lower pricing along with lower volume growth negatively impacted the net growth.

Apart from the personal and home care segment, Colgate-Palmolive pet nutrition segment also posted good revenue growth. Volume gains in the segment were led by the U.S., Russia, and Canada. The segment's net sales jumped 4.5% during the quarter.

Colgate's full year 2013 revenue rose 2% compared to the net revenue of year 2012.


Colgate's operating and net margins have declined during the fourth quarter and full-year 2013 compared to the corresponding periods of the previous year. However, if we exclude the impacts of the non-recurring items and the restructuring costs then the margins appear to be improving.

During the fourth quarter, the company's gross margin has raised by 50 basis points as the company cut its costs of sales as a percentage of revenues under its restructuring program. However, its selling, general and administrative expenses as a percentage of revenues increased by 227 basis points and pushed down the operating margins. If we adjust these expenses for the restructuring program then these expenses are reduced and the company's operating profit would improve by 50 basis points YoY.

Source: SEC Fillings

Colgate's diluted per share earnings during the fourth quarter of 2013 were 60 cents per share, compared to 63 cents per share during the fourth quarter of 2012, reflecting a decline of approximately 5%. The company's adjusted diluted per share earnings rose 75 cents per share, compared to 70 cents per share in Q4 2012, reflecting a YoY growth of slightly more than 7%.

Colgate's full-year margins were also impacted by the company's restructuring program costs. The company's full-year gross margin expanded by 50 basis points as well but the operating margin dropped by 240 basis points. However, the adjusted profit margin has improved by 30 basis points, compared to 2012's operating margin.

Full-year diluted per share earnings were $2.38 per share compared to $2.57 per share in 2012, whereas the adjusted per share earnings in 2013 were $2.84 per share compared to the adjusted per share earnings of $2.68 in 2012.

Balance Sheet

In 2013, Colgate-Palmolive's net debt (total debt less cash and cash equivalents) rose 8% compared to 2012's level. The company's debt-to-equity, which is already higher than the industry average, has jumped further this year. The company's current debt-to-equity ratio is 2.26 versus the industry average of 0.31, reflecting a considerable difference that could create problems for the company and its investors.

Although Colgate-Palmolive's cash flow from operations in 2013 has reached to $962 million compared to $884 million, the company's ability to cover its debt from cash flows has declined due to an increase in the debt level. The higher debt would increase the company's future interest expenses and could put investors' earnings in risk.

Source: SEC Fillings

Capital Return

Colgate paid diluted dividend of $1.33 per share in 2013 compared to $1.22 per share in 2012 reflecting a growth of 9%. For the first quarter 2014, the company has declared a dividend of 34 cents per share, compared to 31 cents per share for the first quarter of 2013.

Moreover, the company repurchased shares worth $1,521 million compared to $1,943 million bought in 2012. Colgate's stock price in the last year has appreciated by 10.94%, but over the last 3 to 4 months the stock price has been depreciating. From November 1, 2013 the price has depreciated by around 6%.

Future Outlook

Colgate is the undisputed global leader in the oral care industry. The company's leadership will continue into the future as it is rapidly expanding its operations outside North America; especially in the developing countries. The company is effectively expanding its presence in new and existing geographic areas through its continuous innovation and new product launches.

Colgate is focusing in improving execution on grounds and as a result it is directly reaching small stores especially in rural India where the oral care market is anticipated to grow at a much higher rate than the global growth rate. These expansion and coverage strategies would add growth to the company's future sales.

Besides that, the company's pet food segment is also projected to experience a high growth in the future as the pet food industry is one of the fastest growing industries in the U.S. and because the pet ownership in the country is rapidly increasing. I expect that Colgate-Palmolive's sales will grow at a good pace in 2014.

Since the company is implementing a restructuring program that has improved its margins in 2013 I expect that margins in 2014 will expand further and increase the company's future profitability.

Final Thoughts

Colgate's financial performance in 2013 did not seem to be very attractive since the company was going through restructuring programs that increased its expenses and depressed the company's margins and net earnings. However, once the company has completed these programs then it will definitely work towards expanding its future margins. The company's top line is also projected to grow in the future. Together these factors would improve the company's per share earnings and enhance the operating cash flows and shareholder's profits.

The only problem is the higher level of debt on Colgate's balance sheet. However, as its cash flows are expected to grow in the future on the back of higher revenues and net earnings I expect that it will be in a better position to cover the debt.

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.