Colgate-Palmolive (CL) is a global personal care and hygiene company which derives over 50% of its sale from Latin America and other emerging markets. The company also owns Hill's Pet Nutrition, a pet nutrition brand, which it could spin-off in the future and provide a catalyst for the stock.
Colgate continues to increase its global leadership position in the toothpaste and manual toothbrushes categories for all ages. Its personal care products business recently acquired Sanex, a Western European brand, and is also growing organically. From a financial standpoint, the company offers a stable and rising (since 1964) dividend for an annual dividend yield of about 2.5%. Finally, Colgate has solid fundamentals and is repurchasing shares, which should further help the stock performance.
Colgate reported its first quarter results, which were good despite economic difficulties in most developed economies. The company had strong organic sales increases in Latin America (+13.5%), which represents 28% of its sales volume, Greater Asia/Africa (+10.5%), which accounts for 21% of sales, and North America (+5.5%), which contributed 18% to the company's sales. Only the Europe and South Pacific segment, which represents 20% of sales, had a negative organic growth (-2%). Even Hill's Pet Nutrition, which contributes 13% to overall sales, had a slight organic growth (+2%). Company wide, first quarter sales increased by 5% (+6.5% organic) compared to the first quarter of 2011. On a net income per share basis, Colgate earned $1.23, which was 6% higher compared to the same period of 2011. In addition to offering growth, Colgate's earnings are easy to predict as the company's actual earnings in the past nine quarters have come within one or two pennies from analyst estimates.
Emerging Markets Position
Colgate has a leading position in some of the largest emerging markets including China, India, Russia and Brazil (CIRB). The growth in the first two markets is driven by increase in population and in the second two by the commodity boom, among other secular reasons. Dental care as well as hygiene needs are basically the same in the developed as well as the emerging markets. The major difference is that the CIRB countries have a combined population of nearly 3 billion compared to about 0.5+ billion in the developed countries. As of the latest data available, Colgate has 79.3% of the toothpaste market share in Latin America, 34.6% in China, and 52.3% in India. Its mouthwash market share is similar to that of toothpaste. A major reason for this dominance in emerging markets is that Colgate is embracing product localization. For example, in India, Colgate offers a unique herbal toothpaste that is made of local herbs such as neem (a natural antiseptic), clove (which families use for toothache) and pudina (known as mint).
Looking at some of its competitors, Colgate performance in the first quarter was clearly better on a relative basis. For example, Procter & Gamble (PG), which is larger than Colgate and owns the Crest and Oral-B brands among other, had an organic sales growth of 3% during its most recent quarter. This is 3.5% lower than that of Colgate. In addition, Procter & Gamble's earnings per share declined from the January-March quarter of 2011 by 13.8% to $0.81 per share in the same period this year. While it is difficult to determine the reasons for this underperformance, I think a large part is due to the reason that Latin America and Asia, where the concentration of fast-growing emerging markets is higher, contribute only about 25% of Procter & Gamble's total sales.
Hill's Pet Nutrition
In 2011, Hill's Pet Nutrition business represented about 13% of Colgate's annual sales of $16.7 billion. In 2009, this business represented 14% of the company's sales. It is clear that this is a slower growing segment, which, in addition, is not related to dental care and personal hygiene. Hill's Pet Nutrition operating margin is about 25%. A combination, for example, with Nestle's (OTC:NSRGY) pet food business could be beneficial for Colgate as well as for Nestle. Nestle's pet care business has a lower operating margin (about 20%) and it should be able to improve its margins by acquiring a higher-margin business. Similarly, Procter & Gamble's pet care segment has a lower operating margin. In addition, Procter & Gamble and Colgate pet care sales rank distant fourth and third behind Nestle (2nd) and Mars (1st). A combination between Colgate's and Procter & Gamble's pet care operations could provide a better competitive position.
Colgate's stock trades at a forward 2013 price to earnings ratio of 16.7 compared to 15.6 for Procter & Gamble. The stock is clearly not cheap. However, Colgate offers better operating profit margin (22.8%) than Procter & Gamble (16.3%) and a better growth rate. In addition, a price to earnings ratio of 16.7 is closer to the 10-year low of 12 (in 2009) than to the high of 27 (in 2002 and 2006). Most importantly, Colgate has an edge as the company has more exposure to high-growth emerging markets. Also, I believe that due to Colgate's focus mainly on dental care and personal hygiene, the organization is able to put most of its energy into these two areas. In most cases, a specialized company provides a better return on invested capital.
Colgate-Palmolive is a leading consumer products brand with over 50% of sales coming from emerging countries, in which many of the company's products dominate the market. Colgate's recent acquisition of Sanex should boost the company's higher end products in Western Europe once the economic turmoil there is over. If Colgate is able to develop Sanex brand further and maintain its strong position in emerging markets, the stock could offer a significant growth opportunity for a consumer products company. A successful sale of Hill's Pet Nutrition could be another catalyst for the stock. In the meantime, investors are paid a stable and tax-advantaged dividend that currently yields 2.5%. The dividend yield is above that of the twenty year U.S. treasury bond's yield of 2.4%.
As with every investment, there are risks. I think in the case of Colgate, the upside potential is higher than the downside under most macro-economic situations. For investors seeking exposure to emerging markets, Colgate is one of the safer choices.