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A Financial Analysis of Colgate-Palmolive
For many consumers, the personal products industry is a familiar one. With recognizable companies such as Proctor & Gamble, Avon Products, and Kimberly-Clark, many investors may feel a sense satisfaction investing in companies whose products they use daily. Another one of these companies, Colgate-Palmolive (CL), is a 34 billion dollar company with a lot of similarities to the aforementioned corporations. However, unlike P&G or Avon, Colgate-Palmolive has a great business model and better fundamentals that should lure investors into buying shares. According to Reuters, Colgate-Palmolive "is a consumer products company. The Company manages its business in two product segments: Oral, Personal and Home Care, and Pet Nutrition." These segments mean that Colgate produces goods like, "toothpaste, toothbrushes, mouth rinses, dental floss and pharmaceutical products for dentists and other oral health professionals." Toothpaste and dental floss are usually products that consumers will buy regardless if the economy is good or bad. Since many experts, like Alan Greenspan argue that the economy may be entering times of high economic instability, having a defensive stock like Colgate-Palmolive may not be a bad idea. In addition, since many pet-owners are not willing to give up their pets during times of depression or recession as well, these individuals will have to continue buying food for their animals—regardless of their respective income situation. In addition, because Colgate-Palmolive operates in over 90 countries around the world (more specific to its pet brand), there should be no reason to see falling revenue or operating margins for this company with growing demand of these products. However, many investors may argue that the same argument can be made for P&G or Avon Products. All these companies produce the same goods and have similar brand recognition. However, what differentiates Colgate-Palmolive from the rest of the industry is its fundamentals. According to Capital IQ, year over year, Colgate has seen nearly 11% quarterly revenue growth. Comparing this number of P&G’s 9.10%, Avon’s 8.40%, and Kimberly-Clark’s 7.8%, there is a definite agreement that Colgate is performing well. In addition, Colgate’s operating margins, probably a more important statistic over the past year, stands at over 20.39%. Only P&G can match this number, as both Avon and Kimberly-Clark have percentages below 16%. Supporting a 23.75 revenue per share, Colgate’s strong top-line numbers transcends to its bottom-line figures as well. Although Colgate does not have terrific year over year quarterly earnings growth, its profit margin over 11% easily beats out the three aforementioned competitors. Using this number in relation with share price, Colgate’s forward P/E ratio of 18.1 is nearly 7 points less than the industry average of 25. This forward ratio also beats out Avon Product’s similar ratio, not to mention Colgate’s trailing multiple of over 27. It may seem with average P/E multiples that investors may not look at Colgate as a value stock. Looking at differing multiples such as price to sales, enterprise value to revenue, and enterprise value to EBITDA, Colgate has the respective figures of 2.7, 3.7, and 12.7. Comparing this number to Kimberly-Clark, which had the lowest forward P/E ratio of all the aforementioned companies, and its respective numbers are 1.89, 2.07, and 9.55. These numbers are not extremely significant when compared to Colgate’s, but this juxtaposition does confirm that Colgate is not undervalued. What this company is instead is a strong-defensive growth company. One way to prove this, in addition to the revenue and margin evidence support provided earlier, is to look at the PEG ratio. Colgate’s 1.95 figure, where growth is accounted for the next five years, is lower than both Avon and Kimberly-Clark. If Colgate can manage to sustain its strong revenue and operating margin growth, this company will continue to see strong EPS results, which translates to lower multiples, which translates to a higher share price. Some skeptics may say this probably will not happen, but look not further than Colgate's management team to see otherwise. Looking at some of the management ratios, the all important ROE for Colgate is at an astonishing 112% number. Not only does this number smash the industry's respective return on equity of 16.6%, but beats out Avon Products' 75% ROE—the next highest of the aforementioned companies. According to Reuters, Colgate also has an industry-beating ROA of 16.79% and an industry-beating ROI of 26.19%. CEO Reuben Mark and his 34,700 employees have a done a fine job running the company, and the revenue, margin, and management performance all support this claim. The choice about purchasing shares of Colgate should be obvious. It's true this company may be considered average with its 0.92 current average and 1.88 LT debt to equity, but Colgate is growing. However, the US economy is not (at least substantially), and because Colgate is a defensive stock, share price growth is relatively imminent. With a fairly strong dividend payout of 2.20% and a fairly linear share price movement since its IPO in the late 1970s, there is strong evidence for any investor to begin thinking of purchasing shares of Colgate.
-Dennis Biray
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