Is this an Ideal Defensive Stock?
Gayatri is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Colgate-Palmolive (NYSE: CL) recently reported 2Q12 EPS of $1.33 (excluding certain items), which was in-line with the consensus estimates and up 6% versus 2Q11. Global unit volume grew 5.0%, pricing increased 3.5% and foreign exchange was a negative 6.5%. The major positive was the organic sales growth of 8.0%, which was the largest increase the company has seen in eight quarters, driven by unit volume gains and higher pricing on a worldwide basis. Going forward, I am confident about the company’s growth prospects given the expansion in emerging markets, new product launches and market share gains in international markets.
New Products Launch in 3Q
In 3Q, Colgate will launch many new innovative and improved products like Colgate Optic White mouthwash to complement the existing regimen of toothpaste and toothbrush. The new line’s premium-looking packaging and fragrances such as lemon thyme, ginger white tea and lime basil will appeal to mass-market consumers with a desire for affordable luxuries. Additionally, to widen its territory, Colgate is launching Palmolive Fresh in the dish liquid category. Furthermore, the company also plans to increase advertising as a percentage of sales going forward. With increased brand awareness and a vast range of products, I expect the company to grow its EPS at a double digit rate.
Expansion in Emerging Markets
Colgate has been steadily expanding its operations throughout Latin America, Africa, and Asia to maintain positive sales growth in these regions. The company's global market shares in toothpaste and manual toothbrushes are both at record highs year to date, 45% and 32.8%, respectively. Going forward, I see continued growth given the low penetration of oral care in emerging markets.
The company is well positioned to maintain its domestic market share while increasing market share in the international markets. These market share gains appear to be broad-based across a number of categories, including toothpaste, mouthwash, manual toothbrushes, bar soaps, body wash, shampoo, household cleaners and fabric conditioners. The company showed impressive organic growth of 13% and generated roughly 53% of its revenues in the fast-growing emerging markets. Oral care has become a major growth area in developing regions of the world with high populations such as Asia and Africa. These countries are just beginning to appreciate the importance of oral care. As a result, we expect that the company will continue its organic sales momentum.
Defensive Investment with Good Dividend
Colgate is a defensive investment that remains immune to large market fluctuations and has been raising its dividend for the last 49 years. Even during the 2008-2009 recession, Colgate was able to raise its dividend, showing its resilience. I believe this trend will continue in the future and expect dividend increases of 5% each year for the next three years further providing support for the stock price.
Moreover, with high gross margins (~57.6%), impressive returns on equity (~91.94% in ttm) and a good dividend yield (~2.3%), we find Colgate attractive. Although, Colgate is trading at a premium to its peer group of Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB), we believe it is justified as the company has better growth prospects. Colgate's expected EPS growth of 6.36% in the current year and 9.5% next year is certainly better than P&G (0.25%, 8.2%) and on par with Kimberly Clarke (7.9%, 7.3%). Moreover, Colgate has a better chance at maintaining price/volume, capturing cost savings and leveraging broad geographic and category exposure.
Overall I believe the 2Q results are very solid and am impressed by Colgate's ability to deliver robust organic growth despite challenging macro conditions. I attribute this to the company’s leading share position in many markets/categories and successful innovation. I rate Colgate as an ideal stock for a defensive investor.
GayatriSharma has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Kimberly-Clark and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.