Innovation Is The Key For Colgate

| About: Colgate-Palmolive Co. (CL)


Colgate’s last quarter provided organic growth hidden under bad foreign exchange. Bottom-line initiatives helped earnings grow 4%.

Innovation and new product offerings are integral to acquiring future sales.

Bottom-line initiatives are also proving to be beneficial.

Colgate-Palmolive's (NYSE:CL) first quarter earnings on April 25th satisfied the expectations of analysts and helped continue increasing the share price. The company is one of the most dominant players in the industry and as indicated by its current 44.3% share of the global toothpaste market. Colgate announced yet another successful quarter at the beginning of this month.

In this article, I will briefly discuss those earnings highlighting the significant facts. I will also touch on the future potential and how the one-year 7% price return should continue in the future.

Second Quarter

Colgate's sales stayed even at $4.3 billion during the period. However, this wasn't very worrying because volume grew 2.5% with pricing giving adding 1.5%. It was the foreign exchange that bought a 4% headwind to the top line. Therefore, organic sales excluding the foreign exchange, acquisitions, and divestments were positive at 4%.

For a company that has been in the business for a very long time, maintaining a positive organic sales figure is a tough job. Demand for Colgate's products depends a lot on demographics in developed nations such as population growth although it is a poor growth measure to rely upon. However, for developing nations it is a completely different story. The demand factor for those nations includes elements of income growth and rising standard of living. This is why Colgate experienced a fast 6.5% organic growth coming from the emerging markets.

Higher pricing more than offset the increase in raw material and packaging costs during the last quarter for Colgate. Therefore the gross margin, in both reported and adjusted terms, grew 30 bps and 20 bps respectively with additional benefit coming from cost saving initiatives under the Funding-the-Growth and the 2012 restructuring program.

Even the adjusted selling, general, and administrative expense fell as a percentage of revenues by 40 bps to 34.4% from the figure reported a year ago. The decline was due to less spending on advertising which was somewhat offset by higher overhead expenses.

The net result was adjusted earnings growth of 4% to 73 cents on a year over year basis. Hence, whatever top line pressure came from bad foreign exchange was mitigated through bottom line initiatives. Nonetheless, organic sales proved that even top line growth wasn't stagnant. Let's have a deeper look at what future potential this organization has in store.

First, let's talk about innovation. Colgate's selling point lies in introducing new variants or additions to its current product portfolio. At present, the enamel-strengthening segment is the fastest-growing market in the toothpaste industry with over 54% of consumers worried about their tooth enamel. For this, Colgate has introduced new toothpaste which replenishes natural calcium and other minerals back into the weakened enamel. It also fills in rough spots at the same time polishing the enamel surface to prevent germs from sticking to the teeth.

What's even more convincing is the marketing strategy designed to promote this product. Colgate has introduced packaging which is interactive in the sense that it has a touch-and-feel surface which shows the difference between unhealthy rough enamel and healthy smooth enamel feel like. This will be complemented with a side by side marketing campaign that will use television, print, social media, mobile platforms and other media.

In addition to toothpaste, Colgate's Maximum Cavity Protection with Sugar Acid Neutralizer mouthwash is proving successful across Europe and the South Pacific. The first quarter launch in Australia and Norway has achieved 3.7% and 3.5% market share respectively as reported in the latest quarter. The company has just launched in the UK and has already reached a record market share there. The product should snatch additional top line growth as the rest of Europe is serviced in the later part of this year.

More new products are planned for the second half of this year as well. The company will continue the distribution of Colgate Max White One Optic. Whitening is the second biggest segment in toothpaste in Europe and Colgate holds the first position which gives the company an added advantage to promote its products.

My point of talking about these innovations is to let investors know that there isn't any other way to grasp organic units. These innovations have already proven successful as Colgate's global mouthwash share is at an all0time high of 17.2% reporting a growth of 80 bps since last year.

This growth is praiseworthy since oral care makes up of 44% of the company's stock price and will be a major component of the company's future potential. Moving downwards to bottom line, I would like to highlight that Colgate has faced some high costs owing to expensive topical oils and agricultural commodities. Adding to the misery is the poor foreign exchange movement.

However, the company's restructuring plan is set to deliver after-tax savings of $90-$110 million. These should help in maintaining if not increasing margins. The "Funding the Growth initiative" is also delivering more profits. Last quarter, Colgate received a 220 bps boost to its gross profit through the program. If things continue progressing in this manner the bottom-line pressures shouldn't be much to worry about.

Bottom Line

Colgate has one of the highest return on equity "ROE" in the industry. Its trailing twelve months ROE stands at 135% as compared to industry average ROE of 21%. Cost pressures surround every firm and all of the competitors have an equal opportunity to grasp market share. That being said, it is evident that Colgate is a winner. With all of its innovations and measures to improve internal operation management there is enough proof to suggest that the company will be a solid investment for the future. Therefore, I recommend buying the stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.