Colgate-Palmolive (NYSE:CL) is a premier consumer products company that experienced a slowdown in revenue growth in the middle of its 2014 fiscal year. The company attributed the slowdown, in part, to further emerging market weakness in the categories as they saw macroeconomic weaknesses. Although CL faces near-term pressures, we note that the company's recent market share of global toothpaste and manual toothbrushes reached 44.6 percent and 33.4 percent, respectively. Additionally, the global market share for the company's mouthwash business reached a record 16.9 percent. CL's market leading brands, product innovation, marketing expertise and strategic proactive acquisitions will lead the company's shares higher in the intermediate and long term. Given CL's near-term pressures, however, the company has reduced revenue and earnings estimates for their fiscal 2015.
In our recent articles regarding classic dividend growth stocks, we have noted that a combination of an extended period of low interest rates initiated by the U.S. Federal Reserve and companies with exceptional dividend growth histories have led to shares of such dividend stocks to appreciate to levels where the price-to-earnings ratios of such dividend stocks are far above their respective historical levels. CL is one such stock, as the price to earnings ratio for the stock is above the company's historical price-to-earnings ratio of the mid-to-upper teens.
As interest rates rise, investors will begin to have an alternative lower risk investment vehicle, bank deposit accounts, which will offer more competitive interest rates. As bank deposit accounts begin offering more competitive interest rates, there is a high likelihood that investors exposing their investment funds to riskier investments in stocks with dividend yields will begin to pull back towards bank deposit accounts. As investors pull back from highly priced dividend growth stocks and the share price of such stocks tends to drop, potential investors should then start to consider establishing a full position in a dividend growth stock such as CL. Therefore, although the company's shares currently yield about 2.1 percent and have a long history of yearly dividend increases, we believe potential investors should wait until CL's share price drops at least 15 to 20 percent before establishing a full position.
Background
CL is a leading global consumer products company that operates in the oral, personal and household care and pet food markets. The company's products are marketed in more than 200 countries and territories worldwide. CL's oral, personal and home care division accounted for 87 percent of the company's total worldwide sales in 2013. The rest of the company's revenues were from the company's Hill's pet foods and care division. The company's oral care products include toothbrushes, dental floss, toothpaste and pharmaceutical products for oral health professionals. CL's personal care products include bar and liquid soaps, shampoos, conditioners, deodorants, antiperspirants, and shave products. The home care business produces major brands such as Palmolive and Ajax soaps. Within the oral, personal and home care market, Latin America represented 33 percent of 2013 sales, Europe/South Pacific 22 percent, North America 20 percent, Asia 16 percent and Africa/Eurasia 8 percent. The company's oral, personal and home care products are sold to retail trade customers and wholesale distributors.
Third quarter 2014 earnings
In CL's latest earnings report, it announced adjusted earnings of 76 cents per share, a 4 percent increase from the year-ago quarter. With one-time items included, earnings were 59 cents per share, a 15.7 percent from the year-ago quarter. The company's global sales were $4.379 billion, a decrease of about 0.5 percent from the year ago quarter. On an organic basis (excluding foreign exchange, acquisitions and divestitures), CL reported sales growth of 3.5 percent. Adjusted gross profit margins decreased as the benefits from cost saving initiatives under the company's 2012 restructuring program as well as higher pricing were more than offset by increases in raw material and packaging costs.
International acquisitions will grow earnings for years to come
In late 2014, CL acquired a local toothpaste maker in Myanmar. This acquisition is the latest example of the company's ability to proactively manage its global portfolio of products to target global economies with growth potential in the consumer products market. The company purchased Laser Brand Toothpaste for about $100 million. The acquisition constitutes one of the largest investments from an American company in Myanmar since economic sanctions against the country were eased in 2012, ending the country's multiple decades of isolation under military rule. The opening of Myanmar's economy is considered to be lucrative for multinationals that produce consumer goods, given the rising disposable income of Myanmar's 51 million population. Demand for beauty and personal care products in the country has been growing at a rate of 14 percent since 2009. Given such recent demand growth for personal care products, Myanmar is considered one of the 20 markets that will offer the most opportunities for consumer goods companies globally. Myanmar's economy is expected to grow by an average of 8 percent in the near term.
Our views
CL is likely to maintain its strong market share and continue investing in research and development and marketing. The company will also eventually benefit from rising incomes and changing lifestyles, especially in less mature overseas markets. In addition, acquisitions in overseas markets, such as the Myanmar acquisition discussed above, are also likely to drive revenue and profit growth. Risks to the company's future performance, however, include increased competition in the global oral care market, greater-than-anticipated commodity cost pressure, unfavorable currency fluctuation, and weaker-than-expected consumer acceptance of new products.
The current price to earnings ratio for CL shares is about 30.35 and the shares yield 2.1 percent. In addition, the company has a recent history of substantially raising its dividends in addition to substantial share buyback activity. CL's forward price to earnings ratio is 22.25 based on 2015 earnings estimates of $3.11. We should note that CL's price to earnings ratio in the previous 10 years has ranged from 15.1 to 27.2. We should also note that earnings estimates for 2015 have fallen over the last few months. Given that CL's current price to earnings ratio is above the high-end of the historical price to earnings ratio for the company's stock, an investor should wait for CL's share price to pull back to a range of $54.50 to $57.50 (a forward price to earnings ratio in the range of 17.5 to 18.5 based on 2015 price to earnings estimates) to establish a full position.
Disclosure: The author is long CL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
http://www.information.myanmaronlinecentre.com/colgate-palmolive-near-term-pressures-long-term-rewards-cl/
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