Colgate-Palmolive (NYSE:CL) is a world-class consumer products company that experienced a slowdown in their revenue growth in the second quarter that began towards the very end of the quarter. The company attributes the slowdown, in part, to further emerging market weakness in their categories as they saw the macroeconomic weaknesses sharply affected their product categories. Given the pressures CL faces, the company has reduced their revenue and earnings estimates for 2014 and 2015. Despite these revenue and earnings estimate changes, CL shares have risen to 52-week and all-time highs in recent months.
The company's shares currently yield about 2.3 percent and have a long history of yearly dividend increases. While no stock should be considered a "safe stock" without any risk, CL shares are relatively safe in comparison to many high-profile stocks and should be strongly considered as a building block of any long-term investor's portfolio. Investors should place CL shares on their watch list to purchase after a moderate pullback.
CL is a leading global consumer products company that operates in the oral, personal and household care and pet food markets. The company's products are marketed in more than 200 countries and territories worldwide. CL's oral, personal and home care division accounted for 87 percent of the company's total worldwide sales in 2013. The rest of the company's revenues were from the company's Hill's pet foods and care division. The company's oral care products include toothbrushes, dental floss, toothpaste and pharmaceutical products for oral health professionals. CL's personal care products include bar and liquid soaps, shampoos, conditioners, deodorants, antiperspirants, and shave products. The home care business produces major brands such as Palmolive and Ajax soaps. Within the oral, personal and home care market, Latin America represented 33 percent of 2013 sales, Europe/South Pacific 22 percent, North America 20 percent, Asia 16 percent and Africa/Eurasia 8 percent. The company's oral, personal and home care products are sold to retail trade customers and wholesale distributors.
The Hill's division markets pet foods and care products that: 1) are sold by authorized pet supply retailers and veterinarians for everyday nutritional needs; and 2) are a range of therapeutic products sold by veterinarians and authorized pet supply retailers to help nutritionally manage disease conditions in dogs and cats.
Second quarter earnings
CL reported second quarter adjusted earnings of 73 cents per share. When including one-time items, earnings were 67 cents per share and were up 12 percent from the year ago quarter. Global sales of $4.35 billion were almost the same compared with the year ago quarter. Sales benefited from a 2.5 percent growth in volume and a 1.5 percent increase in prices. On an organic basis (excluding foreign exchange, acquisitions and divestitures), the company recorded sales growth of 4 percent. Adjusted gross profit margin increased as the benefit from cost saving initiatives as well as higher pricing more than offset increase in raw material and packaging costs. The CEO of CL summarized the second quarter and the market conditions the company faces as follows:
"Clearly, we saw a slowdown in the top line pace of the company in the second quarter, and that really began towards the very end of the quarter. And as you break that down, one contributing factor is further emerging market weakness in our categories as we see the macro economic weaknesses finally come more sharply to our categories. You will recall on the first quarter call that we revised the category growth rates for the emerging markets down to a 5% to 7% range from the previous 6% to 8%. And based on what we saw in the second quarter, we see for the balance of the year those emerging markets still posting good growth but at the lower end of that range. …
… our market shares around the world continue to be strong and accelerating in Mexico and the U.S., 2 particular geographies that we were focusing on since the beginning of the year. And our innovation pipeline is deep and rich, not just for the balance of 2014 but into 2015 as well. We continue to feel that the strategy we have been deploying for several years, a strategy that focuses on building brands with our consumers, creating innovation that drives growth, maintaining the efficiency and effectiveness that funds that growth … continue to be the right strategy, as does our execution on the fundamentals of our business around the world. We believe both remain correct, and that is what we are redoubling our focus on for the balance of this year.
So with that as a backdrop, while we continue to expect organic growth for the company this year to be in that 5% to 7% range, albeit towards the lower end of that range given the current world environment. … On the material cost side, we have seen further increases in material costs … and, of course, the continued transaction headwinds due to foreign exchange. … The restructuring program remains on track, and we continue to expect after-tax savings of between $90 million and $110 million. … we remain comfortable with our 4% to 5% dollar EPS range …."
Companies in the household products industry engage in the manufacture of non-durable consumer goods such as cleaning products, detergents, disinfectants, brooms, mops, towels, rags, disposable plates, and cutlery. The industry is mature, slow-growing, and price competitive. Major competitors include Procter & Gamble (NYSE:PG), Kimberly-Clark (NYSE:KMB), Clorox (NYSE:CLX), Church & Dwight (NYSE:CHD) and Energizer (NYSE:ENR). Demand is driven by population growth and consumer preferences. Individual company profit depends on product innovation, effective sales and marketing, and efficient operations. Large companies have size advantages in purchasing, manufacturing, distribution, and marketing, and smaller companies compete using specialization and niche product offerings. Also, increasing retail consolidation in developed markets, which puts price pressure on various manufacturers.
Analysts' views and our views
Analysts believe that CL will be able to maintain their strong market share and continue investing in research and development and marketing. Analysts also believe that the company will eventually benefit from rising incomes and changing lifestyles, especially in less mature overseas markets. Analysts believe, however, that the sales growth deceleration at CL appears to have occurred more suddenly and near the end of the second quarter of 2014. As, such analysts have lowered their organic sales growth and earnings estimates to reflect such deceleration. The substantial majority of analysts currently have a "hold" rating for CL's shares with price targets ranging from $58 to $70.5 with a consensus price target of $70. Risks to analysts' estimates and target prices include increased competition in the global oral care market, greater-than-anticipated commodity cost pressure, unfavorable currency fluctuation, and weaker-than-expected consumer acceptance of new products.
We generally agree with analysts' conclusions regarding CL's shares. The current price to earnings ratio for CL shares is about 27.3 and the shares yield 2.3 percent. In addition, the company has a recent history of substantially raising their dividends in addition to the company's substantial share buyback activity. CL's forward price to earnings ratio is 21.8 based on 2014 earnings estimates of $2.96 and 19.75 based on 2015 earnings estimates of $3.27. We should note that CL's price to earnings ratio in the previous 10 years has ranged from 15.1 to 27.2. We should also note that earnings estimates for 2014 and 2015 have fallen over the last few months. In the last few months, CL's share price has hit 52-week highs and all-time highs. That said, with overall markets at or near record highs, an investor should wait for CL's share price to pull back to a range of $57.25 to $60.50 (a forward price to earnings ratio in the range of 17.5 to 18.5 based on 2015 price to earnings estimates) to establish a full position. Finally, we should note that CL's shares have seen extensive insider selling with no purchases in recent years.
Disclosure: The author is long CL, CLX, KMB, PG.
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.