Colgate-Palmolive: A Defensive Buy Which Is Likely To Outperform
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Last month, at the Deutsche Bank Global Consumer conference, Colgate-Palmolive’s (NYSE: CL) Justin Skala highlighted the company's dominant and resilient market share trends along with the strong growth that the company is witnessing. Colgate's strengths can be seen in multiple areas, such as year-over-year revenue and EPS growth of 5.2% and 5.8% respectively, and a 101% return on equity in the trailing 12 months. The company’s stock price has also outperformed its peers significantly over the same period. While Colgate’s stock is up 17.87% in the last year, Proctor & Gamble (NYSE: PG) is down 4.65%, Unilever (NYSE: UL) is up 3.35%, and The Clorox Company (NYSE: CLX) is up 5.73%. We believe Colgate will continue to outperform its peers as the company’s fundamentals are moving in the right direction. In this article, we will be discussing some of the key bullish arguments for Colgate.
Emerging Markets Skew & Defensive Business Mix
Colgate’s strong emerging markets skew and defensive business mix make it a good buy in the current uncertain economy. Its main products are considered necessities, and consumers purchase them whether the economy is good or bad. Also, the company generates about 54% of its sales in developing markets. Its category growth in key countries remains healthy despite an unfavourable macro environment. It reported a worldwide organic growth of 8%; an organic growth of 13% in Latin America in 1Q12; and a local currency category growth of high single digits to low double digits in China and India.
New Product Momentum
Colgate launched Luminous White in the last quarter of fiscal 2011 as the Latin American equivalent of the US Optic White toothpaste. The company has indicated that it has shown terrific results so far, reaching more than six and five share points in Mexico and Brazil, respectively. Its market share trends in the Latin American oral care market are likely to continue in the positive direction as the impact of P&G’s push dissipates.
Capacity Expansion Plans in India
India has a huge growth potential in oral care, as just around 50% of the Indian population uses toothpaste and only 15% of those users brush twice a day. With P&G's recent announcement that they will be focusing primarily on their 40 top countries in the near future, the chances of any significant competition in this market have reduced significantly. Colgate is already on the right track to capture this opportunity and increase its market size in India; the company has announced that it is expanding its production capacity in India by opening a fifth production facility in the country.
Gross Margin Expansion
With its Funding the Growth (FTG) program and inflation-justified pricing in emerging markets, Colgate has managed to find a way to tackle both anticipated and unanticipated headwinds and expand its gross margins. Colgate is implementing the the next leg of FTG, including simplification and standardization efforts which aim at an additional 5% reduction in SKUs, 3% reduction in formulas, and 5% reduction in fragrances in 2012. Colgate is also addressing gross margin challenges with long-term programs to drive personal care margins to oral care levels. If the company is able to achieve its target, this segment could post a ~1000 bps improvement in the margins.
Colgate is trading at a forward PE of 17.71. Although this is a slight premium to other large cap peers, we believe it is justified given the company's defensive mix, emerging market skew, growth prospects, and margin improvement. We believe the company is likely to continue its outperformance going forward and put a buy recommendation on the stock.
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