Colgate-Palmolive (NYSE:CL) is a consumer product company focused on the production, distribution, and provision of household, healthcare, and personal products. The company operates in oral, personal, and home care, and pet nutrition segments. CL leads the oral care market through its toothpaste and manual toothbrush brands. Oral care generates a large proportion of the company's total revenues and in 2013 sales of oral care were 46% followed by personal products sales at 21% and home care sales at 20%.
During the fourth quarter of 2014, earnings beat the estimates by around 1.6% but missed revenue estimates by 0.6% compared to a miss of 1.5% in the third quarter. Despite a strong unit volume increase of 6.5% the quarterly revenues of $4.36 billion grew by 2% from the same quarter during the previous year. The significant positive aspect was organic sales growth of 6.5%.
CL managed to grow its organic sales from the emerging markets by 10.5% despite the economic slowdown in the region. It continues to expect high growth in fiscal year 2014 resulting from the introduction of new products in all categories and geographic regions. The exchange rates proved to be a headwind and the company warned about the devaluation of Venezuela's Bolivar. The foreign exchange rate volatility negatively impacted the company's earnings by nearly 4.5%.
The net income of $564 million resulted in a diluted earnings per share of $0.60 when compared to the net income of $589 million and earnings per share of $0.63 in the fourth quarter of 2012. Excluding the impact of restructuring in both quarters the net income was $697 million reflecting an increase of 4% compared to the fourth quarter of 2012. The improved margins supported the earnings growth. The diluted earnings per share in the fourth quarter of 2013 were $0.75 reflecting an increase of 7% compared to the fourth quarter of 2012. Despite the higher raw and packaging costs, CL successfully improved its gross margins by 50 bps year-over-year to 58.9% and further improvement will become evident in 2014.
For the second quarter CL has announced it would increase dividends by 6% and the new dividend per share would be boosted to $0.36 from $0.34. The increase may not be too high but it is consistent. CL is a good option for stable dividend seeking investors because the company has a long history of dividend payments and has paid uninterrupted dividends on its stock since 1895. With the strong net operating cash flows of $3,204 million this expectation is valid and CL will continue its dividend growth history.
In the fourth quarter of 2012 CL commenced a four-year restructuring program to sustain the long-term growth. For restructuring purposes, during 2013, the company spent $202 million compared to $81 million in 2012. Through this restructuring the earnings are expected to improve. The company expects to save $365 million to $435 million annually by the end of the fourth year.
The Strong Market Footing and Growth from BRIC Countries
Growth in the emerging markets is highly attributed to growth in Brazil, Russia, India, and China (BRIC). BRIC countries contain about 40% of the world's population and account for about 17% of the world's economy. The BRIC countries have seen very fast GDP growth and a 3-year GDP growth rate of 7.6% is way higher than the 0.1% 3-year GDP of the U.S. The GDP plays an important role for the demand of oral hygiene products in the emerging markets and the growing GDP is an indication of the increasing demand for health care products.
CL remains the global leader in toothpaste and manual toothbrush products with approximately 45% and 33% market shares, respectively. The company also showed significant improvement in its mouthwash category with a global market share of 17%. In the emerging markets of India and China CL dominates the oral care market. The growing demand for consumer products in China, India, and South-East Asia will boost the earnings in 2014.
The global oral care market totaled more than $31.8 billion in 2013 with a CAGR of 3.3% over 5 years. The economic slowdown will result in a CAGR of 3.2% and the oral care market will hit above $36 billion by the end of 2017. The oral care industry of India accounts for around 5% of the global market. According to a report by KenResearch, the industry revenues are expected to grow at a CAGR of around 13.9% from 2013 to 2018. This pace is much faster than the global CAGR growth of around 3.2%. CL dominates the Indian oral care industry with a market share of 54.3% in 2013 and increased from 51% in 2011.
Amongst oral care products, the toothpaste segment is likely to sustain its dominance over the next five years. In India the toothpaste per capita consumption is 147 g/p and this consumption rate is likely to increase due to improving disposable income. This lucrative market growth has invited new competitors for CL. Procter & Gamble (P&G) and GlaxoSmithKline (NYSE:GSK) recently entered the oral-care market. However CL's increasing penetration through aggressively low pricing and strong distribution will help the company to maintain its market lead. CL's broad innovative product range at different price levels will result in improved earnings for the coming years.
The graph shows CL's penetration and market share in India.
Source: Investor presentation
The oral care market in China is estimated to grow by 5.92% year-over-year over next four years reaching $3.17 billion by the end of 2017. Similar to India, the toothpaste is by far and away most the valuable product segment in China's oral care market. CL market penetration is showing an upward trend and the company has a market share of 33.9% in the toothpaste market of China. The launch of innovative products such as Colgate Plax fresh tea and Colgate Plax fruity fresh will continue to add growth for the company.
CL's total return to an investor, both from price appreciation and dividends (assuming the dividends are reinvested), has outperformed Proctor & Gamble (NYSE:PG) and Church & Dwight (NYSE:CHD). However the 15.53% total return remained lower than the 23.48% of the S&P. Despite that, CL's return over twelve months was higher than its competitors.
For the fiscal year the decline in earnings per share adversely impacted the P/E ratio. The trailing twelve months P/E 26.7X is higher compared to the industry P/E of 21.1X and this is a bit expensive. The stock is trading at a forward P/E of 18.5X with a 5-year forecasted growth of 8.6%. However, the outlook for fiscal year 2014 is quite strong. The saving from restructuring and growth in the company's core product categories, successful innovation, and expansion into emerging markets points to a good future outlook for the company. Improvement in its gross margins will further benefit the company and generate funds for advertising that will help the company to gain more market share. Based on these facts I give this stock a buy rating and suggest that investors purchase it when there is a dip in price.
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 a Gemstone Equity Research research analyst. Gemstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Gemstone Equity Research has no business relationship with any company whose stock is mentioned in this article.