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CL AT A GLANCE

P/E ► 18.4 AVG EV/EBITDA ► 11.8 AVG ROA ► 20.9% HIGH ROE ► 80.4% HIGH Debt to Equity ► 2.75 AVG Current Ratio ► 1.17 AVG Interest Coverage Ratio ► 40.8 HIGH

 

 

 

 

 

 

Colgate-Palmolive (NYSE: CL) is one of the world's largest Consumer Products companies by market share with commercial presence on six continents.^[1] Since its 1806 founding, Colgate has grown into a multinational corporation known for its toothpaste and oral hygiene products with a $15.3 billion in net sales and $2.0 billion in net income for FY08.^[2] As of the end of 2008, the company holds a staggering 44.8% global market share with its flagship toothpaste product line. ^[1]

Colgate's major advantages are the strength of its brand and its strong, global presence: 82% of the company's Q2 FY 2008 revenues came from outside the United States, and about 40% came from rapidly growing emerging markets (Latin America represented Colgate's single largest source of revenue in 2007).^[3] Colgate's brand strength in foreign markets allows the company to command impressive market share and high profit margins. An example of this is Colgate's leading mouthwash market share of 40% in Brazil.^[4] Colgate has been steadily expanding its operations throughout Latin America, Africa, and Asia, maintaining consistent positive sales growth in these regions. For example, in 2008 Colgate increased net sales by 17% in Latin America and by 14% in Asia and Africa. ^[5]

In the quarter ending September 2009, Colgate reported earnings of $590 million, or $1.12 a share, up from $500 million in the year-ago period, beating expectations of $1.11 per share.^[6] Revenue rose to $4 billion from $3.99 billion, boosted by a 5% in the prices of its products worldwide. ^[6] The rise in earnings were also helped by higher sales volume and cost cutting. ^[7]

Business Overview

Colgate has operations in North America, Latin America, Europe/South Pacific, and Greater Asia/Africa. The company divides its business into two product segments: Oral, Personal and Home Care, and Pet Nutrition.

• Oral, Personal and Home Care (86.0% of net sales, 101.4% of operating income)^[8]
  • Oral Care (41% of sales)^[9]: Colgate's most recognizable products are in oral care, including Colgate-brand toothpaste, toothbrushes, mouth rinses and dental floss. As of the end of 2008, the company holds a staggering 44.8% global market share with its flagship toothpaste product line. ^[1] Growth in this product line is highly dependent on rebranding and new product introduction. Colgate also produces pharmaceutical products for dentists and other oral health specialists.
  • Personal Care (22% of sales):^[9] Colgate has tried to grow this segment through acquisitions, taking a controlling stake in organic goods company Tom's of Maine in 2006. Primary brands: Irish Spring, Softsoap, Palmolive, Speed Stick, Lady Speed Stick, Crystal Clean, Team Spirit, Afta, Skin Bracer
  • Home Care (23% of sales):^[9] Ajax, Palmolive, Crystal White Octagon, and Dermassage dishwashing detergents/degreasers; Suavitel faric conditioners; Murphy and Ajax household cleaners.

• Pet Nutrition (14.0% of net sales, 17.9% of operating income) ^[8] Colgate's Hill's Pet Nutrition makes specialty pet nutrition products for dogs and cats. Hill's pet products are marketed primarily under two brand names: Science Diet, a wide array of over-the-counter products for everyday use, and Prescription Diet, therapeutic products sold to help malnourished pets threatened by disease.

Colgate Oral, Personal, and Home Care Sales by Region ($M)^[8]

Colgate Financial Performance 2006-2008 ^[10][11]

Product Sales by Region

Colgate also divides its operations into the following regions:

North America

North America is Colgate-Palmolive's oldest geographic region and one of its most mature markets, representing 19% of total net sales.^[5] Growth has slown noticeably in years, though it hasn't stopped: fiscal 2008 saw a North American revenue increase of 5%. ^[5] To maintain steady growth in this market, Colgate employs three principle strategies:

• Continual rebranding--Colgate can convince customers to spend more and growing company sales by releasing new twists on under established brands. Examples: Colgate Luminous Mint Twist toothpaste, Softsoap Brand Pure Cashmere moisturizing body wash, Irish Spring MoistureBlast bar soap
• Growth through external acquisition: Acquistions like the Tom's of Maine deal (2006) can help Colgate tap into hot new markets that Colgate itself has little or no expertise in. In Tom's case, it was the rapidly expanding organic personal care products market. Tom's of Maine contributed 0.5% to North American sales growth in 2007.^[12]

Latin America

Latin America represents Colgate's single largest geographical region by sales and has been the prime propeller of the company's growth over the past decade.^[13] In all, Latin America represented 27% of Colgate's sales.^[5] Net sales and operating profit in Latin America both grew 17% in 2008.^[5] Strong growth in countries such as Brazil, Colombia and Argentina were driven by core brands such as Colgate Total and Sensitive toothpastes and Lady Speed Stick Double Defense deodorants. Despite the strong performance of this region in the past, analysts now fear that Colgate may be approaching a point of saturation in its Latin American region--if so, a noticeable slowdown in sales growth may be in the company's future.

Europe/South Pacific

At the beginning of 2006, Colgate modified its geographic report structure to "address evolving markets and more closely align countries with similar consumer needs and retail trade structures." As part of this move, Eastern European countries and Russia were transfered to the "Asia" region, while operations in the South Pacific and Australia were transfered to the Europe/South Pacific region. The Europe/South Pacfic segment represents another of Colgate-Palmolive's more mature, slow-growing markets. In 2008, net sales grew 6% and operating profit declined 2%.^[5] Again, growth in this more mature market was driven primarily by rebranding and introducing new products such as Colgate Time Control, Colgate Max Fresh and Colgate Sensitive Multi-Protection toothpastes. Colgate also used its acquisition strategy to grow sales with its acquisition of GABA, a Swiss toothpaste maker, in 2003.

Greater Asia/Africa

In 2006, Eastern European countries and Russia were grouped into the Greater Asia/Africa region because they are more closely aligned with the growing emerging markets found in places like the Philippines, Vietnam and India. In FY 2008, net sales in Greater Asia/Africa increased by 14.0% and unit volume grew 7.5%.^[5] The company experiences particularly strong sales growth in Malaysia, Thailand, Vietnam, India and the Gulf States. This segment includes several rapidly growing emerging markets and will likely be a driver of the company's sales growth.

2004-2008 Restructuring

In 2008, Colgate completed a 4-year restructuring program in which it cut 12% of its workforce and closed a third of its factories. ^[14] production processes were streamlined and eight manufacturing facilities were closed or realigned, including consolidating all Europe toothpaste production into one plant in Poland.^[15] Overall, Colgate streamlined its global supply chain, reallocated resources to enhance the operations in high-potential developing countries and consolidated these organizations in certain mature markets.^[16] The company incurred a pretax cost of roughly $1 billion as a result of the restructuring, though the plan is expected to save $475-$500 pretax annually. ^[15] Colgate's management expects the finalization of the restructuring plan to enhance the company's ability to compete in the 2008 recession. ^[16]

Trends & Forces

Emerging Markets Key for Growth

Emerging markets across the globe present strong growth opportunities for Colgate-Palmolive. In 2008, emerging markets represented 45% of sales.^[17] As populations grow wealthier in emerging markets such as Brazil, Russia, India and China, consumers are becoming ever more sophisticated shoppers. Colgate Palmolive's strong international brand presence means that it is much more highly exposed to emerging markets than its competitors. Generally, this exposure benefits Colgate--emerging markets can grow at three to four times the rate of developed markets such as the US, Western Europe and Japan, which means more profit opportunities and sales growth for Colgate. ^[18]

Latin America: Possible Market Saturation

One challenge that has arisen with Colgate's rapid expansion in Latin America is the company's overdependence on growth in that region. In 2008, Latin America accounted for 27% of total sales and 33% of operating profit.^[17] Due to fast growth in the region, Latin America alone has contributed to 40% of Colgate's organic growth over the past few years. Because of this high dependence on Latin American growth, the company is highly vulnerable to Latin American economic slowdown and market saturation. This is particularly true of Mexico, where Colgate already has an 80% market share of the toothpaste market. ^[19]

US Dollar has risen against major basket of currencies ^[20]

Foreign Currency and the Dollar

Another trend affecting Colgate-Palmolive is the relative strength of the dollar. Although the company is based in the US, Colgate-Palmolive generates more than two thirds of its revenue outside United States.^[13] Because of this, the company is very sensitive to the strength of the dollar, with a weaker dollar boosting sales. With foreign economies slowing in the global economic downturn, the value of the US dollar has risen. In the fourth quarter of 2008, the rising dollar decreased operating profit by 8-9%. ^[21] Analysts at Caris & Co. expect the stronger dollar to hurt sales by 13.9% in 2009. ^[22] In Q1 2009, the euro fell 5.2% against the dollar, leading to a 20% drop in sales in Europe and the South Pacific. ^[23] On the other hand, the company's management expects the negative effects of the strengthening US dollar to be mostly offset by commodity cost declines, cost savings initiatives, and price point increases in 2009. ^[16]

Colgate has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctations. Although this heding limits the potential upside of a weakening dollar, it also insulates the company from drastic upswings in the dollar's strength.

Retail Consolidation

The rise of a handful of powerful low-priced retailers has negatively impacted consumer products companies. A handful of big retailers have captured a large share of the market. For example, from 1999 to 2004, the top 10 food retailers in the US increased their share of food retail sales from 53.4% to 58.9%.^[24] These large retailers have shifted the balance of power within the supply chain. For example, Wal-Mart has exerted its power over other suppliers to their detriment in the past, such as forcing record companies to produce clean-label CDs and pulling adult magazines.^[25] In addition, many retailers have pushed their own higher margin private label brands in competition with Colgate.

Rise of Private Labels Leads to More Competition

In the past decade, Colgate has faced competition from private label brands or "store brands" of large retailers such as Wal-Mart, Target, and supermarket chains. Private label products often sell at lower price points and earn higher margins because the retailers can control the cost of their production. For example, Wal-Mart offers 5,500 products through its "Great Value" brand, which has increasingly sold as consumers feel the recession squeeze on their disposable income.^[26] From 2003 to 2008, sales of Target's private label products rose an average of 15% annually. ^[26]

Large retailers are close to the consumers, have the point of sale data on consumer behavior and are in better position to understand consumer behavior. These strengths contribute to better private label product development, which directly compete with Colgate products. Retailers also promote their own brands as they earn higher margins on them. However, Colgate continues to maintain a 44.8% market share in toothpaste and a strong brand name,^[1] which will make it difficult for private labels to erode Colgate's market leadership. In addition, many analysts believe that outside of home care, Colgate's exposure to private labels is limited. ^[27]

Comparison to Competitors

*2007 financials reported for Unilever (UL) and L'oreal (LRLCY). All others are 2008.

**L'Oreal and Unilever are European companies. Currency conversions based on dollar/euro exchange rates for Dec 2007 as reported by FRBNY,^[40] provided for reference only.

Market Share

Colgate Toothpaste Global Market Share [41]

Colgate Mouthwash Global Market Share [41]

Colgate Manual Toothbrush Global Market Share [41]

References

1. ↑ ^{1.0 1.1 1.2 1.3} "Colgate Announces 4th Quarter Earnings Exceeding Expectations," 29 Jan 2009
2. ↑ ^{2.0 2.1} Google Finance "Colgate"
3. ↑ Colgate-Palmolive FY 2008 10-Q, page 17
4. ↑ Q1 FY 2008 Earnings Release
5. ↑ ^{5.0 5.1 5.2 5.3 5.4 5.5 5.6} CL 2008 Annual Report, page 3
6. ↑ ^{6.0 6.1} New York Times "Colgate and P.&G. Beat Forecast"
7. ↑ Wall Street Journal, "Procter & Gamble, Colgate Report Better-Than-Expected Profits"
8. ↑ ^{8.0 8.1 8.2} CL 2008 10-K, Item 8 "Notes to Consolidated Financial Statements," page 70
9. ↑ ^{9.0 9.1 9.2} CL 2008 10-K, Item 8 "Notes to Consolidated Financial Statements," page 44
10. ↑ CL 2008 10-K, "Consolidated Financial Statements," page 40
11. ↑ CL 2008 Annual Report, page 6
12. ↑ Colgate-Palmolive FY 2007 10-K, page 20
13. ↑ ^{13.0 13.1} Blogging Stocks, "Colgate-Palmolive (CL): A dividend superstar"
14. ↑ AP "Colgate Plans to Reduce Workforce by 4,400 Jobs"
15. ↑ ^{15.0 15.1} CL 2008 10-K, Item 7 "Management's Discussion," page 21
16. ↑ ^{16.0 16.1 16.2} CL 2008 10-K, Item 7 "Management's Discussion," page 31
17. ↑ ^{17.0 17.1} HBC Capital Markets, CL, page 2
18. ↑ James A. Gingrich, "Five Rules for Winning Emerging Market Consumers"
19. ↑ Colgate, "Colgate 3Q 2004: Europe and Latin America"
20. ↑ [1[id]=TWEXM&s[1][range]=5yrs Federal Reserve Bank of St. Louis]
21. ↑ RBC Capital Markets, CL, page 5
22. ↑ AP "Colgate-Palmolive downgraded on value, estimates"
23. ↑ "P&G, Colgate Say Sales Declined on Stronger Dollar"
24. ↑ [http://www.google.com/url?sa=t&source=web&ct=res&cd=3&url=http%3A%2F%2Fwww.deloitte.com%2Fdtt%2Fcda%2Fdoc%2Fcontent%2Fus_cb_cpgseriesarticle1_020707opt.pdf&ei=nFfxSbapJ8eblQfjlbHADA&usg=AFQjCNE9dpbqXA0yYSsyWCttHsCLFL_BoQ&sig2=NWh7U8DQ1KvjK7c9JPWdtg Deloitte "The Future of Consumer Product Companies" page 3]
25. ↑ The Motley Fool, "A Wal-Mart Monopoly?"
26. ↑ ^{26.0 26.1}
27. ↑ RBC Capital Markets, CL, page 3
28. ↑ CL 2008 10-K, Item 1 "Business," page 2
29. ↑ Google Finance, "CLX"
30. ↑ Clorox 2008 Annual Report, "Consolidated Statements of Earnings," page 22
31. ↑ Morningstar CLX Quick Take
32. ↑ PG 2008 Annual Report, Note 12, "Segment Information," page 75
33. ↑ PG 2008 Annual Report, "P&G at a Glance," page 84
34. ↑ Unilever 2007 Annual Report, "Financial Review," page 23
35. ↑ Unilever 2007 Annual Report, "Notes to the Consolidated Accounts," page 81
36. ↑ Google Finance KMB
37. ↑ Kimberly-Clark 2008 Annual Report, page 3
38. ↑ L'Oreal 2007 Annual Report, Chapter 2 "Management Report," page 58
39. ↑ L'Oreal 2007 Annual Report, Chapter 1 "Consolidated Financial Statements," page 114
40. ↑ FRED "US Dollar/Euro Monthly Exchange Rate"
41. ↑ ^{41.0 41.1 41.2} Citigroup Global Markets Analyst Report, CL, page 4