A Company Investors Should Brush Their Portfolios With?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As the 2012 year draws to a close, I would like to pinpoint on a leading consumer products company, Colgate-Palmolive (NYSE: CL).

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Strengths:

  • Solid Revenue Growth: In 2006, Colgate reported revenue of $12.2 billion; in 2011, the company announced revenue of $16.7 billion, representing year over year annual growth of 6.48%, this trend is widely anticipated to sustain into the future, with projections placing 2016 revenue at $21.6 billion

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  • Dividend: At the moment Colgate pays out quarterly dividends of $0.62, which annualized outs the dividend as yielding 2.37%
  • Double Digit Margins: Currently, Colgate possesses a net profit margin of 14.53%, representing a strong and profitable company
  • Recession Proof Products: The company sells consumer products, necessities such as toothpaste and soap that is required in all economic landscapes, and this recession proof characteristic of the company provides investors with greater predictability and certainty
  • Brand Name & Consumer Loyalty: Colgate’s portfolio of brands includes Palmolive, Ajax, Irish Spring, Speed Stick, numerous types of toothpastes, and Sanex; and these brands create a security wall around the company as customers trust their brands, and it would take years for another company to build such strong and lucrative brands
  • Institutional Vote of Confidence: 74% of shares outstanding are held by institutional investors, displaying the confidence some of the largest investors in the world have in the company and its future

Weaknesses:

  • High Valuation: Colgate currently holds a price to earnings ratio of 20.54, a price to book ratio of 21.23, and a price to sales ratio of 2.97, all of which point to a company with a high valuation, however when the company’s predictability is taken into consideration some of the valuation can be explained

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  • Debt: Currently, the company possesses about $4.9 billion of debt on their balance sheets, a major downside to the business

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  • Little Room for Geographical Expansion: Colgate’s products are marketed and sold in over 200 countries around the world, leaving little room for geographical expansion, however that is not to say growth is not possible in current markets
  • Operating Expenses: While the costs related to operating a business increase as the business expands, over the past 10 years operating expenses have outgrown the growth in the market capitalization of the company, a terrible sign

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Opportunities:

  • Product Innovation: Colgate is consistently rolling out new products, with its most recent being Colgate 360o toothbrushes, and further product innovation should excite consumers and drive growth
  • Latin America: In 2011, the company derived 28% of sales from Latin America, a region in which sales increased 12.0% year over year, and further growth from this market is highly probable, and should fuel overall company growth as this region is the largest segment of Colgate’s business
  • Greater Asia/Africa: In 2011, 20.0% of sales were derived from the company’s greater Asia/Africa region, a region which year over year grew 9.5% in sales, and further growth is likely to be derived from this region
  • Expanding Markets: Colgate’s main markets, oral care, hair care, and cleaning products, are all currently growing, and are widely anticipated to continue growing into the future, making Colgate only have to maintain their current market share to participate in the growth

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  • Dividend Growth: Since implementing their dividend program in 1895, Colgate has consistently raised their dividend, and this trend is widely expected to sustain well into the future

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Threats:

  • Competition: The consumer products industry is severally competitive, and this competition to offer the best products for the least amount of money can lead to margin compression
  • Rising Input Prices: If any of the numerous chemicals or ingredients Colgate utilizes to make their products were to rise in price, the company would be faced with either passing the costs onto their competitors and risk losing customers or swallowing the costs in their margins
  • Game Changing Products: Any game changing products or shifts in the industries Colgate operates in could lead to them falling behind the competition

Competition:

Major publically traded competitors of Colgate include Procter & Gamble (NYSE: PG), Church & Dwight (NYSE: CHD), Avon (NYSE: AVP), and Clorox (NYSE: CLX). All of these companies are major consumer products companies, posing major threats to Colgate. P&G is undeniably the biggest threat to Colgate as they rival Colgate in their oral care segment. P&G is valued at $185.96 billion, pays out a dividend yielding 3.31%, and carries a price to earnings ratio of 22.19. Church & Dwight is valued at $7.47 billion, pays out a dividend yielding 1.80%, and carries a price to earnings of 23.06. Avon is valued at $6.03 billion, pays out a dividend yielding 1.72%, and carries a price to earnings ratio of 51.87. Finally, Clorox is valued at $9.55 billion, pays out a dividend yielding 3.50%, and carries a price to earnings ratio of 17.65.

The Foolish Bottom Line:

Colgate is a tremendous company, one which possesses solid revenue growth and a growing dividend. The company is recession proof, as its products are required in all cycles of the economy. The company is exposed to the fast growing markets of Latin America and China. However, Procter & Gamble is a much more diversified company, and a much better investment in terms of stability. However, Colgate-Palmolive is also an excellent long-term investment.    


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company. Motley Fool newsletter services recommend 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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