We are maintaining our long-term Neutral recommendation on Colgate-Palmolive Company (CL) with a Zacks #3 Rank, implying a short-term Hold rating with a target price of $106.00 per share.
Colgate-Palmolive is the industry leader in oral care and commands market-leading positions in several personal care product categories. Furthermore, a strong portfolio of globally recognized brands provides a competitive advantage to the company and strengthens its dominant position in the market.
Colgate-Palmolive recently posted a solid first-quarter 2012 with earnings per share and global net sales rising nearly 7% and 5%, respectively. The growth was primarily attributable to a 3.5% surge in pricing and global unit volume, partially offset by a 2% negative impact from foreign currency translations along with increased material and packaging costs.
The company now expects 4% - 7% growth in global unit volume, and gross margin expansion in the range of 75 to 125 basis points in fiscal 2012.
We believe the company’s strategy of focusing on innovations for developing new products regionally will facilitate it in enhancing its customer base while increasing market share.
Moreover, Colgate-Palmolive is focusing on acquiring businesses, which have the potential to generate higher top-line growth and margin. In line with this strategy, the company recently acquired the Sanex business. The company also divested its laundry detergent brands in Colombia. Colgate-Palmolive believes that these transactions will contribute 1% to earnings growth in fiscal 2012.
Further, Colgate-Palmolive recently sold $500 million worth of 10-year medium-term notes maturing in May, 2022 at a coupon rate of 2.30%, which is believed to be the lowest 10-year coupon rate. The company will use the funds to retire its old commercial paper. We believe the transaction will enhance the company’s financial flexibility while retaining focus on future growth prospects.
However, the competitive dynamics in the household products industry have radically changed from the earlier emphasis on cost savings and manufacturing efficiencies to gaining market share. As a result, costs have increased with the rise in marketing and promotional expenditures, which we believe may weigh on its bottom-line growth.
Moreover, due to its exposure to international markets, Colgate-Palmolive remains prone to currency fluctuation. The weakening of foreign currencies against the U.S. dollar may require the company to either raise prices or contract profit margins in locations outside the U.S. An increase in product price may have a direct impact on consumer demand.
Above all, Colgate-Palmolive operates in an intensely competitive environment. The resurgence of archrival Procter & Gamble Company (PG) has signaled new challenges. Global competitive conditions have also intensified, and Colgate-Palmolive is facing strong competition in China, Russia, India, Hong Kong, Brazil and Mexico.
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