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Summary

  • International operations doing their part in supporting Colgate's overall revenue stream.
  • Penetration and product innovation in international markets ensure that the company’s outlook is bright.
  • Analysts are expecting the company to grow by 8.65% in the next five years.

I am bullish on Colgate Palmolive (NYSE:CL) due to its healthy performances lately and its promising future outlook. The company recently reported promising results for 1Q14, with its best-in-class innovations and effective cost saving initiatives. Both emerging and developed markets contributed well to growing the organic sales base of CL in the recent quarter, thereby reporting a 6.5% year-on-year increase in the overall organic sales base. However, on the margins front, CL showed mixed results in the recent quarter. With its cost saving initiatives being adversely affected by increased packaging costs, CL only slightly expanded its gross margins.

CL's future outlook is bright, with its restructuring program delivering benefits to grow bottom line results. Moreover, in 1Q2014, the company experienced a 3% year-on-year increase in EPS and analysts are expecting a robust next five years growth rate of 8.65%. Other than robust growth potential, the company offers a dividend yield of 2.1%, backed by its solid cash flows. Also, the stock offers an upside potential of 4.5%, based on my target price of $70.

Globally-Spread Company

CL is well positioned in the global Consumer Industry and is geographically spread throughout the world. In the recent past, the company has been witnessing growth from both emerging and developed markets. Its product lines are mainly divided into Oral Care, Personal Care and Homecare categories. The following pie chart shows the geographical net sales contributions in 1Q14 for CL.
(click to enlarge)
Source: Company's Quarterly Earnings Report

Financial Highlights
In the recent past, the company's top and bottom line results have been adversely affected by currency movements, as the company has earned approximately 75% of its revenues from international markets. The company reported an organic sales growth of 6.5% year-on-year in 1Q2014, completely offset by 6.5% currency movements.

The company has been delivering satisfactory performance in both developed and emerging markets. The company's 1Q14 results were benefited by growth in both developed and developing markets. CL experienced a 2.5% year-on-year increase in organic sales, driven by a 3.5% increase in sales volume, partially offset by a 1% drop in net pricing. Sales volumes for the company in developed markets largely benefited by the innovation of optic white toothpaste and promotional activities.

Moreover, emerging markets offer robust growth potential for CL, as the population and per capita income is increasing in emerging markets. As the company continues to expand its operations and increase its product lines in the fast growing emerging markets, it will portend well for the company's top and bottom line results. The company experienced a 10% year-on-year organic sales growth in emerging markets, driven by a 6.5% increase in volumes and a 3.5% increase in pricing. The following table shows YoY sales growth and foreign exchange impacts by CL's geographical segments.

Organic Sales Growth 1Q2014

FX impacts

Total Company

6.5%

(6.5%)

North America

3.5%

(1%)

Latin America

11%

(16%)

Europe/South Pacific

1.5%

1%

Asia

7.5%

(5%)

Africa/Eurasia

10%

(10.5%)

Pet Nutrition

5.5%

(2%)

Source: Form 10-Q

The company has also been targeting to improve its cost structure to support its earnings growth. CL has been making efforts to lower its overhead costs, which lowered SG&A expenses as a percentage of sales by 10bps to 35.3%. I believe as the impact of foreign currency movements is moderating and due to cost cutting measures, the company will experience margin expansion in the coming quarters. The following table shows gross, operating and net margins for the company.

1Q2013

1Q2014

Gross Margin

58.6%

59%

Operating Margin

22.8%

22.5%

Net Margin

15.5%

15.5%

Source: Quarterly Reports and Calculations

Attractive Stock for Dividend Investors

The company also remains an attractive investment option for dividend investors, as the company offers a decent dividend yield of 2.1%, backed by its free cash flow yield of 4%. The company has been consistently increasing its dividends over the years; recently, the company announced a 6% dividend increase, resulting in an annual dividend per share of $1.44 up from $1.36 per share. The dividend is payable on May 15, 2014.

Price Target
I have calculated a price target of $70 for CL. I have used cost of equity 8.45%, after tax cost of debt 3.4%, a nominal growth rate of 3.5% and WACC of 8.15%. Based on my price target calculation of $70, the stock offers an upside potential of 4.5%.

2015

2016

2017

Terminal Value

FCF (In $-Millions)

2,624

3,077

3,539

78,771

Present Value of FCF (In $-Millions)

2,426

2,631

2,798

62,229

Source: (Equity Watch Estimates and Calculations)

Total Present Value of Firm = $2,426 + $2,631 + $2,798 + $62,229

= $70,084

Market Value of Debt = $6,670

No. of shares outstanding = 915.39million

Market Value of Equity = $70,084 - $6,670

= $63,414

Price Target = $ 63,414/ 915.39

= $70

Conclusion

CL has a strong market presence and has been delivering a strong financial performance in recent quarters. The company's operations from outside the U.S., particularly from emerging markets, have thus far supported the company's overall revenue stream quite well. Moreover, the company's future outlook is bright, with its penetration and product innovation in emerging markets; analysts have projected a healthy next five years growth rate of 8.65% for CL. Also, the company has been making efforts to expand its margins. Furthermore, the stock remains attractive for dividend-seeking investors, as it offers a decent dividend yield of 2.1%.

Source: All Signs Look Good For Colgate As Company Earns Bullish Rating