Consumer staple stocks are a relatively safe haven for investing during an economic slowdown, as they are generally less volatile than most other stocks. The companies that manufacture and sell food, beverages, prescription drugs, toothpaste, toilet paper and other household products fall under consumer staples sector. No matter the state of economy, the products sold by companies in the consumer staples sector will be in demand.
The stock price of Colgate-Palmolive Co. (CL), a global consumer products company, has appreciated nearly 18% over the past twelve months. By contrast, the overall market as measured by S&P 500 has lost about 12% during the same time frame.
Overview
Founded by William Colgate, Colgate-Palmolive had a humble beginning as a small soap and candle business in New York City in 1806. But it is now a global brand, competing in more than 200 countries. The company operates in two product segments: oral, personal and home care, and pet nutrition.
The company's oral care products include toothpaste, toothbrushes, oral rinses and dental floss, while personal care products include shower gels, shampoos, conditioners, bar soaps, deodorants, antiperspirants as well as liquid hand soaps. Home care products include dish washing liquids, household cleaners and fabric conditioners. In 2007, sales of oral, personal and home care products accounted for 40%, 23% and 24% of total worldwide sales, respectively.
The pet nutrition segment, which provides specialty nutrition products for dogs and cats, accounted for 13% of the company's total worldwide sales last year.
Colgate's current stock price of $76.91 represents nearly 20 times this year's projected earnings per share. Is there more upside potential for the stock, which currently trades near its 52-week high, or is it poised for a fall?
Earnings scorecard
Colgate's earnings and revenue continue to grow on a year-over- year basis. In the past three years, the company's earnings have grown at a compounded annual growth rate or CAGR of 8.7%, while net sales have improved at 6.56% CAGR.
In 2007, net income rose to $1.74 billion or $3.20 per share from $1.35 billion or $2.46 per share in 2006, helped by 12.5% sales growth. Net sales for the year were $13.79 billion, up from $12.24 billion a year before, driven by 6.5% volume growth and a 5% positive foreign exchange impact.
In the second quarter ended June 30, 2008, Colgate's net income improved to $493.8 million or $0.92 per share from $415.8 million or $0.76 in the year-ago period on strong sales, as higher pricing helped to offset the impact of sharply rising raw and packaging material costs. The company logged $3.96 billion in quarterly net sales, reflecting a 16% jump over the comparable period last year.
Increasing market share
With higher advertising spending to support its existing brands and new products, Colgate continues to build the market share of its key products. In 2007, global advertising spending grew 17% to $1.55 billion over 2006, reflecting an all-time record level. According to the company, in 2007, its global market share of toothpaste, manual toothbrushes, mouth rinse, bar soaps, shower gels and fabric conditioners reached record highs.
In the U.S., market share for Colgate Total toothpaste was 16.2% in the second quarter, which was the highest quarterly share ever. The company's share of the manual toothbrush market for the first half of 2008 was 27.8%, up 2.1 share points compared to last year.
In Mexico, Colgate's toothpaste market share was 85.6% for the first half of this year, up an impressive 230 basis points from the year-ago period. The company's market share of the manual toothbrush market in Mexico reached a record high of 39.1%, up 200 basis points from a year ago.
Colgate also continues to gain strength in its oral care products in emerging markets like the Greater Asia region. In China, the company's toothpaste market share increased by 100 basis points to 30.7% during the first-half of this year from the comparable period a year before.
Brand equity
Brand equity has a direct influence on a company's bottom line. So much so, sometimes a product brand name becomes the company name itself, like in the case of 'Palmolive' - the name at the end of 'Colgate-Palmolive'.
Palmolive-Peet, which merged with Colgate in 1928, was known as BJ Johnson Soap Company until it introduced Palmolive Soap. The Palmolive soap of BJ Johnson Soap Co. contains palm and olive oils as ingredients, compared to animal fats present in the soaps manufactured by other companies. The product and the name became a roaring success, and in 1916, the company adopted the product name. BJ Johnson Soap Company became Palmolive and in 1926 became Palmolive-Peet, following its merger with Peet Brothers' soap company.
After merging with Colgate, the combined company was christened as Colgate-Palmolive-Peet, and in 1953, 'Peet' was removed from the company's name, leading to the current name -'Colgate-Palmolive'.
Colgate's recent personal care product launches include Palmolive Naturals Mint & Eucalyptus, Palmolive Pure Cashmere, Palmolive Thermal Spa Seabuckthorn, Protex Deo 12 and Protex Icy Cool bar soaps, Palmolive Thermal Spa Seabuckthorn shower gel, Palmolive BodYogurt body wash, Palmolive Pure Cashmere shower cream, Softsoap brand Nutra-Oil moisturizing body wash, Palmolive Caprice shampoo and Lady Speed Stick for Teens multi-form deodorant.
Likewise, in the case of Colgate, the name is synonymous with toothpaste and is the moniker for the company. Some of the recent oral care product launches include Colgate Max Fresh, Colgate Max White, Colgate Sensitive Multi Protection, Colgate Total Advanced Clean, Colgate Total Professional Clean, Colgate Max Fresh BURST and Colgate Herbal Seabuckthorn toothpastes; Colgate 360°, Colgate 360° Sensitive and Colgate Twister Fresh manual toothbrushes; Colgate 360° Sonic Power battery toothbrush and Colgate Plax Whitening mouth rinse.
Significant recent home care product launches include Palmolive Scrub Buster with Micro Beads dish liquid, Soupline Aromatherapy and Suavitel fabric conditioners, Fabuloso liquid cleaner, Ajax Professional bucket dilutable cleaner and Ajax Professional glass cleaner.
Restructuring programs
Due to intense competition and steep increases in raw and packing material prices, Colgate's earnings in 2004 were dented, though its net sales crossed the $10 billion mark for the first time. Net income for 2004 declined to $1.33 billion or $2.33 per share from $1.42 billion or $2.46 per share in 2003.
The company subsequently embarked on a four-year restructuring and business-building plan in the fourth quarter of 2004 to enhance its global leadership position in its core businesses. The restructuring plan, which is currently underway and is nearing completion, is expected to generate annual after-tax savings of $250 million to $300 million by 2008. The ongoing 'Funding the Growth program' has been generating average annual savings of approximately $350 million, according to the company.
Global presence
Colgate's products are sold in over 200 countries. The geographic diversity and balance help to mitigate the company's exposure to risks in any one country. The company derives about 75% of its net sales from operations outside the U.S. Colgate's major markets outside the U.S. include Latin America, Europe and the Greater Asia region.
Latin America, where the company holds a stronghold, accounts for nearly 25% of its net sales and 31% of its operating profit.
Acquisitions & Divestitures
The company continues to expand its presence in new markets and strengthen its existence in mature markets by making strategic acquisitions.
Some of the significant deals crafted by Colgate include the acquisitions of:
-- Murphy Phoenix Co, a manufacturer of wood cleaner Murphy Oil Soap for $65 million in 1991,
-- Mennen Company for $670 million in stock and cash in 1992, which helped Colgate expand into new areas of deodorant and baby-care markets,
-- Kolynos business, a multinational Oral Care business, marketing toothpaste, toothbrushes, mouth rinse and dental floss from American Home Products for $1.04 billion in 1995,
-- European oral care company GABA Holding AG in 2004, and
-- An 84% stake in Tom's of Maine, the pioneer in natural toothpaste, mouthwash, and deodorant, for approximately $100 million in 2006.
In order to focus on its mainstay business, Colgate has divested itself of companies outside its core of personal care products and those business lines that came under competitive pressure.
In 1980, Colgate-Palmolive divested RAM, a maker of golf clubs, and in 1986, it jettisoned its athletic shoe unit Etonic. Some of the other operations, which Colgate sold, were Riviana food operations, Curity baby apparel, Bike athletic goods and Medasonics diagnostic equipment. In 1988, Colgate sold its Kendall Health Care unit.
As part of Colgate's efforts to "de- emphasize " detergents and focus on its higher-margin and faster-growing oral and personal care businesses, it off-loaded its Viva detergent brand in Mexico to German consumer products and chemical company Henkel KGaA in 2000. Three years later, Colgate sold its European laundry detergent brands, including Axion and Gama in France, Ajax in Sweden, Dynamo in Denmark, and Dinamo in Italy, to Procter & Gamble Co. (PG).
The following year, Colgate sold its detergent business in Ecuador and Peru and two years later divested its Southeast Asian heavy-duty laundry detergent brands, including Fab, Trojan, Dynamo and Paic, which are marketed in Thailand, Malaysia, Singapore and Hong Kong, all to P&G. The same year, the company sold its Latin American and Canadian bleach brands to California-based consumer products firm The Clorox Co. (CLX).
Though the company has made a number of acquisitions as well as divestitures since its inception, its core product categories remain the same - one of the hallmarks of stability.
Strong balance sheet
Colgate has a healthy balance sheet. Since 2004, the company's cash flow from operations has been steadily climbing, thanks to improved profitability and decreased spending. For the latest twelve month period, cash flow from operations totaled $2.33 billion.
Free cash flow in 2007 was $871 million, up from $667 million in 2006. Increasing cash flow signals good times ahead, as it reflects a company's leeway to pay debt, pay dividends, buy back stock and expand its business.
Riding a tight ship, Colgate has managed to increase its gross profit margin year-over-year. Higher pricing, a continued focus on cost-savings programs and a shift towards higher margin products continue to drive the company's gross margin. Colgate's gross margin of 57.18% for the latest twelve-month period is the highest among its peers and is comparable with the industry average of 57.85%. Colgate remains optimistic that its management of operating expenses will enable it to attain its goal of reaching a gross profit margin of 60% by 2008 or sooner. Procter & Gamble has a gross profit margin of 51.27%, followed by Clorox Co.'s 42.04% and Church & Dwight Co. Inc's (CHD) 39.93%.
Colgate's fundamentals, namely the key ratios - Return on Equity, Current ratio, and Quick ratio, remain strong. The company has a current ratio of 1.3, compared to an industry average of 1 and the S&P 500's average of 1.2. If the current ratio, a measure of a company's short-term financial strength is, 1 or greater than 1, it means a company can take care of its current debt. The higher the current ratio, the more the liquidity.
The Return on Equity or ROE for Colgate is an impressive 80.91%, compared to an industry average of 19.30%. For every dollar invested, Colgate returns more than 80 cents to its shareholders, which is quite an attractive number.
Colgate has a quick ratio of 0.9, higher than the industry average of 0.7. Quick ratio is a measure of short-term financial stability. Colgate's quick ratio of 0.9 implies that it has enough cash to cover 90% of its expenses in the coming year.
Colgate's debt to equity ratio of 1.40 is much higher than the industry average of 0.77, while it is lower than the S&P 500's 1.53. The debt to equity ratio shows the amount of the debt financing to the amount of equity financing. A high debt to equity ratio means that the company is borrowing heavily to finance its growth. But for Colgate, whose business is solidly profitable and growing, a high debt to equity ratio is likely not a concern.
Share buyback
Early this year, the company was obligated by its Board to repurchase up to 30 million shares of common stock over the next two years.
Dividend
Colgate has been paying dividends without interruption since 1895. Effective from the second quarter of 2008, the company's quarterly dividend has been hiked by 11% to $0.40 per share. The company's most recent dividend of $0.40 per share was declared on July 10, 2008 for shareholders of record as of July 24, 2008, payable on August 15, 2008.
Upward revision of estimates
Taking into account the company's expansion in emerging markets and the ongoing restructuring program, the consensus earnings estimate for this year has been revised upwards by 4 cents over the past thirty days to $3.89 per share. Next year's earnings estimates have been revised up by 5 cents to $4.34 per share. Over the next five years, Colgate's earnings are projected to grow at an annualized rate of 10.4%.
Business Risks
Rising raw material costs
Colgate's profitability could be adversely impacted by rising raw and packing material costs if the company is unable to pass the higher costs on to consumers.
Counterfeit threat
Any negative publicity could bring down the brand reputation. Last year, the sale of counterfeit Colgate toothpaste, which contained traces of anti-freeze diethylene glycol, was detected in Canada as well as 6 American states. The source of the counterfeit Colgate was traced back to a supplier in China.
Competitive landscape
Colgate faces significant competition from other large, multinational consumer product companies, and failure to compete effectively against them could adversely impact its business.
Conclusion
Colgate's solid profitability, brand equity, global presence, expansion into emerging markets, strategic acquisitions, strong cash position and strong fundamentals, are some of the positive catalysts that could fuel the stock higher. For the past 52 weeks, the stock has been trading in the range of $65.00 - $81.98. At the current price of $76.94, the stock is edged atop the 50-day moving average of $72.54.
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