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Colgate-Palmolive: A Reasonably Valued Consumer Goods Play

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GuruFocus.com
·4 min read
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- By Ishan Majumdar

The Covid-19 pandemic created a need for most consumer goods companies to build a strong online marketing strategy. Colgate-Palmolive (NYSE:CL) reacted well to this changing business environment and went on to deliver strong results across 2020.

The company's growth has been driven by organic as well as inorganic factors in both the oral care as well as the skincare segments in 2020. Despite a decent performance, its valuation multiples have not skyrocketed so far, and the company's stock is trading at a reasonable valuation in my view. I am optimistic about the company's performance in 2021 given the management's increased focus on online growth and its brand enhancement endeavors.


Recent financial performance

Colgate-Palmolive delivered a string of good results in 2020 and has surpassed Wall Street expectations in terms of both revenue and earnings for almost every quarter of 2020.

For the recent Q4 2020 result, the company reported a top-line of $4.32 billion, which implies 7.70% growth as compared to the $4.02 billion in revenue reported in Q4 2019. Its revenues were well above the analyst consensus estimate of $4.15 billion.

Colgate-Palmolive demonstrated a solid margin profile with a gross margin of 61.12% and an operating margin of 21.39% in the recent result.

Its net income was around $647 million, and adjusted earnings per share (EPS) of 77 cents outperformed the analyst consensus estimate by 1 cent.

The company generated $963 million in the form of operating cash flows and spent around $111 million in investing activities, resulting in a solid free cash flow generation.

Strong oral care upside

The company remains focused on its innovation strategy to attain growth in adjacent categories and product segments.

In a bid to expand its oral care portfolio, the company acquired Hello Products LLC, which is a leading oral care brand in the U.S. that produces eco-friendly and organic products.

Apart from the acquisition, the company has a strong portfolio of products like the Colgate Optic White Renewal toothpaste and Optic White Teeth Whitening Pen. The management has continued the expansion of the Naturals and Therapeutics divisions as well.

In March 2021, the company collaborated with Philips to bring oral care benefits of electric toothbrushes to people in Latin America, where the usage of the electric toothbrush is low. Colgate-Palmolive is strategically positioned to benefit from this sophisticated technology and its well-established leadership position in this segment.

International distribution and e-commerce

Colgate-Palmolive's well-recognized brands have had a stable demand with a strong reputation throughout the economic cycle. In order to improve organic sales, the company is aggressively expanding into faster growth channels such as e-commerce

At the same time, it is also extending the geographical footprint of its brands. It is worth highlighting that Colgate-Palmolive sells its goods in more than 200 countries, derives more than 70% of its sales from outside the U.S. and has a robust global distribution network with the ability to penetrate newer markets with ease.

The management is also focussing on making its products available through the e-commerce channel given the pandemic-induced popularity of this space. The company's e-commerce business grew by more than 50% in the fourth quarter of 2020 and has been following a constant upward trajectory.

Professional skincare is also an area of growth for the company as its Elta MD and PCA skin brands have been performing well lately. The buyout of the Filgora skincare business could prove to be another strong growth driver. The management looks to augment its spending on dynamic marketing strategies for many of its key product lines, which could result in continued top-line growth for the coming quarters.

Valuation

Colgate-Palmolive is currently trading at an enterprise-value-to-Ebitda multiple of 17.21 and a price-earnings ratio of 25.44, which are both close to the industry median with respect to the consumer packaged goods space. Even the GuruFocus Value line indicates the stock as fairly valued.

There is limited scope for multiples expansion as an essential goods company, but Colgate-Palmolive can certainly expand the top-line and profitability through more acquisitions within the oral care and skincare space. Colgate-Palmolive's debt-to-Ebitda ratio of 1.88 appears well in control and its capital structure as well as cash reserves provide sufficient leeway to finance more acquisitions. Overall, I believe that given the current backdrop, the company's stock deserves a 'Hold' rating.

Disclosure: No positions.

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This article first appeared on GuruFocus.