Colgate-Palmolive Company: The Ship Is Sailing In Smooth Waters

| About: Colgate-Palmolive Co. (CL)


Stock analysts at UBS AG set a “buy” rating on the stock.

The company is targeting higher top-line growth projecting 5-7% organic growth in FY 2014.

The company seems a bit too optimistic about its top-line growth for FY 2014.

Colgate-Palmolive Company (NYSE:CL) deals in consumer goods through its two product segments: oral, personal and home care; and pet nutrition. The company is a key player in these segments and operates within a well-structured global consumer goods industry. It manufactures and sells its recognized toothpaste, manual toothbrush, and liquid hand soap products through recognized brands.

The company issued its FY 2014 revenue guidance ahead of analysts' estimates while reporting its results for FY 2013. The company is targeting higher top-line growth projecting 5-7% organic growth in FY 2014. The company earned $17.420 billion in revenue for FY 2013 and aims to achieve $18.145 billion (up 4.2% compared to FY 2013) in revenue for FY 2014. However, analysts are estimating the company will attain revenues of $17.78 billion (up 2% compared to FY 2013) for FY 2014. Therefore I will determine whether the company is being more optimistic about its top-line growth or whether analysts are falling short of the company's top-line growth prospects.

First let us overview the company's FY 2013 performance and determine the major revenue drivers of the company.

FY 2013 Top-line Performance and Major Revenue Drivers

Source: CL 2013 10K Filing

The table above shows that the company's total net sales growth declined from 7.10% in FY 2011 to 1.80% in FY 2013. The company's sales volume, excluding divestitures ,as well as the company's organic growth grew at a higher or similar growth rate in FY 2013 in comparison to FY 2012. This is a good indicator and also indicates the company's capability to meet its 5-7% organic growth target set for FY 2014. Also, this means that the slowdown in the growth rate of the company's total net sales was due to other factors as shown in the table below.

Source: CL 2013 10K Filing

You can see from the table above that the company's sales revenue in FY 2013 was majorly impacted by the negative impacts of foreign exchange in comparison to FY 2012. Latin America was the region with the second highest organic growth rate for the company. The region's high growth rate was nullified by the negative foreign currency impact. This was due to the devaluation of the Venezuelan Bolivar so I will discuss the situation of company in Latin America later on in my article.

Another weak performing area of the company for the FY 2013 was the Europe/South Pacific region that recorded a 0.5% decline in organic sales recorded by the company. Finally, Asia is where the company witnessed the highest growth in its organic sales in FY 2013 in comparison to FY 2012. Therefore, I will also discuss the prospects for the company's top line in these regions. Before determining the outlook of these areas with reference to the company's top line let us have a look at the chart below that highlights the company's revenue generation in terms of geography.

Source: CL 2013 10K Filing

You can see from the table above that the company's oral, personal and home care segment is the major revenue driver for the company. The segment generates a majority of its revenues from Latin America followed by Europe. Asia is an emerging region for the company as its revenue contribution to the company's total revenue has increased from 12.39% in FY 2011 to 14.19% in FY 2013. For FY 2013 the company's sales of oral, personal and home Care products accounted for 46%, 21% and 20% of the company's total sales, respectively. So, the company generates a majority of its revenue from oral care products. On the whole, around 80% of the company's net sales originate in markets outside of the U.S. More than 50% of the company's net sales come from emerging markets that include Latin America, Asia (excluding Japan), Africa/Eurasia, and Central Europe.

Therefore, I will analyze the outlook of these major revenue drivers of the company in order to determine the growth prospects for the company's top line.

Latin America Headwinds and Tailwinds for the Company's TopLine

Currency Headwinds

On the whole, Latin America accounts for one third of the company's total sales. As a consequence of overexposure to Latin America, the company's financial performance was adversely impacted due to currency devaluations by the region.

The company's Chief Executive Ian Cook said that foreign exchange fluctuations are expected to hurt the company's total net sales by 3% in the year 2014.

In late January 2014, the Venezuelan government made various announcements affecting currency exchange and other controls. Based on this assumption and the SICAD rate at the most recent 11.70 bolivares fuertes per dollar from Venezuela alone the company receives about 4% of its total net revenue and has disclosed that the devaluation of the Venezuelan currency would result in a one-time after-tax loss of 180-$200 or $0.19-$0.21 per diluted common share during Q1 of FY 2014.

Additionally, the Venezuelan government also issued a new law on fair pricing allowing a maximum profit margin of 30%. It is currently uncertain how this new law may affect CP Venezuela and its current pricing structure but if applied this may have a negative effect on the company's revenue growth from the region.

Market Position and Innovation Tailwinds

The company sustained its leadership position in toothpaste and manual toothbrushes in Latin America and reduced the gap between itself and its major competitor in the mouthwash category. The company's toothpaste market share reached a record level of 71.5% in Brazil and stood above 80% in Mexico despite extended promotional activity from rivals. The company's market share in bar soaps also rose to 29.4% making the company a leader in that category as well. Broadly, the Latin American geography advanced through sustained innovation, new product launches, and better adoption of premium priced offerings by consumers.

The company expects that innovations and new product launches will bring more market share and sales growth. Consequently, the company has constructed a strong pipeline of product launches for the region. The company's maximum cavity protection, plus neutrazucar toothpaste that was launched in Brazil in Q4 of FY 2013, has already acquired a 3% share in the market. The company intends to capitalize on the success of this toothpaste by offering it in Mexico. Further, the company is planning an inclusive marketing campaign for Colgate Total Professional whitening toothpaste, a quality product that is attracting traction in the Brazilian market. The company will also introduce products in the personal care category to drive growth. Some of the planned offerings include men's Speed Stick and lady Speed Stick stress defense deodorant. As a result, I believe that the company will continue to gain shares in the Latin American market as a result of a vigorous pipeline of product launches.

Europe Market Growth

Europe is the biggest regional market for dental consumables due to the presence of several market leaders and an increasing aging population that can pay for expensive dental products.

But the company recorded a decline in organic sales from its Europe and South Pacific region. This was due to higher oral care sales were more than offset by declines in personal care and home care sales so I will determine the demand for personal and home care products in the region for the coming years. Oral care will remain the fastest growing segment as consumers there are becoming more oral care conscious and embracing more wide-ranging daily regimes and innovative products to support their oral hygiene.

European consumers are seeking for more biodegradable home and personal care products that have their reduced environmental impact compared to synthetic solutions. This demand for organic and natural ingredients in the Western European market has forced manufacturers to search for novel sources, including oleo chemicals, to launch specialty ingredients.

Frost and Sullivan estimated the revenues of the organic and natural ingredients market in Western Europe were $659.2 million in 2012 and will rise to $800 million in 2017.

This shift in consumer preferences hurt the demand for the company's products in FY 2013. The company has plans to counter the impact by launching more natural personal and home care products but this may not abruptly recover the headwind the company is facing there.

Asia has more Growth Potential

Geographically, oral care is a substantial part of the company's business in Asia comprising around 86% of net sales in that region for FY2013.

Asian countries like India, China, South Korea, Malaysia, Thailand, and Singapore are expected to provide noteworthy growth opportunities due to the increasing population and growing per capita incomes of the large middle class populations. Additionally, the rising awareness about dental hygiene, oral health, and personal hygiene will confirm a continuous increase in the consumer population taking dental services.

Analyst Ratings and My Take

Stock analysts at UBS AG presumed coverage on shares of Colgate-Palmolive in its recent report. The firm set a "buy" rating on the stock. The company presently has an average rating of "hold" and an average target price of $69.38.

As per my analysis, the company seems a bit too optimistic about its top-line growth for FY 2014. The company's revenue from its major revenue generating region, Latin America, will encounter the adverse effects of initiatives taken by the Venezuelan state. Europe, the second largest revenue generating region for the company, is likely to see a decline in personal and home care products due to changes in consumer preferences. Asia is likely to contribute positively to the company's top-line growth and I expect the company's revenue in FY 2014 will fall near analysts' estimates rather than the higher projected figure disclosed by the company.

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 Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.

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