Dissecting This FMCG Giant

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The recent devaluation of the Venezuelan currency, plus, an average fourth quarter aren’t good signs for Colgate-Palmolive (NYSE: CL). With strong competition from peers such as Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL), the big question remains the same—what’s in store for the company in 2013?

Devaluation of Venezuelan currency

Venezuela accounts for more than 5% of Colgate-Palmolive’s total revenue. Due to ongoing economic and labor issues in Venezuela, Colgate-Palmolive’s South American region hasn’t done that well lately. As a result of recent devaluation of Venezuelan Bolivar by 32%, Colgate-Palmolive expects to report a one-time loss of $120 million, or $0.25 per share in 1Q13. The company’s earnings-per-share are estimated to fall by $0.05 to $0.07 in the quarter.

Quarterly earnings

In 4Q12, Colgate-Palmolive reported earnings of $598 million or $1.26 per share, up from $590 million or $1.21 per share in the same quarter last year. Revenue grew 2.5% to $4.29 billion, missing analysts’ estimates of $4.31 billion. Prices were up 2.5%, while sales volume grew by 1.5%.

Organic sales grew by 4% in the recent quarter, compared to a growth of 5% and 8% in the third and second quarter respectively. Latin America, which constitutes about 29% of the company’s total sales, saw an organic sales growth of just 4% in the fourth quarter, compared to a 9% increase in the third and 14.5% increase in the fourth quarter of 2011. The chief reason behind this was a tough economic and labor environment in Venezuela, which had a negative effect on both sales and profits.

Forecast for 2013

In the next quarter, analysts expect Colgate-Palmolive to earn $1.32 per share on revenues of $4.3 billion. For the full year, the company is expected to earn $5.73 per share on $17.79 billion revenue.

Colgate-Palmolive is trading at a forward P/E (1yr) of 18.25x, which shows that it’s an expensive buy in the fast-moving consumer goods (FMCG) sector. It has a PEG of 2.07 and a dividend yield of 2.20%. According to the sell side, it has a mean target price of $114, suggesting that it’s trading at its fair value and doesn’t have any upside potential at this stage. A mean recommendation of 2.8 on the sell side also shows that it isn’t an attractive buy.

Industry’s major players

The American FMCG company, Procter & Gamble, is trading at a forward P/E (1yr) of 17.63x and has a PEG of 2.38. Incorporating a dividend yield of 2.90% in its PEG gives us a PEGY of 1.7. A mean recommendation of 2.2 on the sell side indicates that Procter & Gamble is one of the top buys in the FMCG sector. Using earnings estimates, I value Procter & Gamble at $85, showing an upside potential of 11%. This makes it one of the most attractive stocks in the industry and a must-buy. You can have a further look at my detailed take on Procter & Gamble here.

On the other hand, Unilever, has recently announced that it would be investing 50 million Euros in order to set up a deodorant plant in India. The plant would be built in the Indian state of Maharashtra and would cater to rising demand in South East Asian countries. Unilever has been keen on focusing more on emerging markets such as Latin America and Asia, where the company saw 10% growth last year. In 2013, analysts expect Unilever to earn $2.33 per share on revenue of $70.29 billion.  A mean recommendation of 2.7 on the sell side shows that it isn’t as attractive as Procter & Gamble.  

Conclusion

In South America, Colgate-Palmolive is still the market leader in toothpastes and toothbrushes, but it has recently faced tough competition from Procter & Gamble. As the company dealt successfully with a recent labor slowdown at one of its major units, production levels are expected to remain stable in 2013. However, the devaluation in the Venezuelan currency is bound to have a significant effect on the company’s profits. Thus, 2013 doesn’t look that bright for the FMCG giant. In short, I still remain neutral on Colgate-Palmolive in the short run.

 

 


Vamosrafa7 has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble and Unilever. 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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