CL - Colgate-Palmolive Stock And Its Real Value

2023-11-29 17:17:08 ET

Summary

• Colgate-Palmolive Company offers a wide array of products, insulating it from consumer spending decline.
• New competition from e-commerce and changing geopolitical environments could impact Colgate's margins and sales growth.
• Colgate invests in sustainability and community improvement, but its fundamentals and overvaluation suggest caution in investing.

Colgate-Palmolive Company (CL) continues to offer a wide array of products for the home and personal care space. This diversification insulates Colgate from the consumer spending decline that has been seen in other industries in the current economic environment. The stability of Colgate makes for a very attractive stock in these times of economic uncertainty in the market. The company does consistently grow its revenue, although the profit for the company does fluctuate up and down year-over-year. Colgate's global outreach and recognizable brand should continue to grow the company's sales in the future.

However, new competition has been entering Colgate’s markets as the continued rise of e-commerce allows for different business models to be successful. The price pressure from the competition could eat into Colgate's margins in the future, although currently the company still maintains very healthy margins. Colgate’s global outreach provides good growth potential but also can be impacted by changing geopolitical environments with tariffs and currency changes. Inflation can also impact Colgate’s raw material prices, which may not be passed onto the consumers due to the price pressure from increased competition. These potential issues seem small compared to the relative stability and consistency of the company overall.

As with most retail companies, there is a mission for striving to get to better sustainability. Colgate continues to invest in improving its climate impact as well as be a part of a broader community improvement strategy. While this does not directly show up in improved sales, the goodwill in the community should help drive consumers as social impact continues to grow within consumer purchase behaviors. The company also continues to increase its dividend amount while implementing stock buybacks consistently. These are additional good signs of a stable company for a portfolio.

When considering these current stories about Colgate-Palmolive Company, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. Colgate seems to consistently maintain stable growth and is a low-risk stock in an increasingly concerning economy. The nature of the global and necessary products that Colgate sells should be insulated from decreases in consumer spending due to economic factors. Competition is increasing within the home and personal care space due to the rise of ecommerce, which could impact Colgate in the future.

While current news stories, good or bad, can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.

This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if Colgate-Palmolive Company is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.

Snapshot of the Company

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. Colgate-Palmolive Company shows a rating score of 72.3 out of 100. This is a decent company rating score, but it leaves plenty of room for improvement.

Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.

Fundamentals

Colgate has continued a slow but steady rise in its share price over the last ten years. The steady revenue and profit growth have resulted in a steady rise in the stock price. If competition continues to rise and sales dip, there could be a small correction in the near term. The overall brand of Colgate should help to continue to maintain its strong presence in the overall market and continue to see growth even if it is small. Overall, the share price average has grown by about 40% over the past 10 years, or a Compound Annual Growth Rate of 3.8%. This return is unremarkable.

Earnings

Earnings per share shows small fluctuations, but overall earnings have remained mostly stable over the past 10 years. Colgate continues to grow its revenue but these gains year-over-year are being lost due to costs and not being seen in the company's profit. Stable earnings are ok, but investors really want to see consistently increasing earnings to realize growth. Operating expenses continue to eat into profits due to increasing SGA expenses. This can be a bit worrying as the increasing revenue is not being used for reinvesting in the company as it’s eaten up by operating costs. This seems to follow the increased competition within the home and personal care space and is something to monitor.

Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.

Return on Equity

The return on equity shows a company that is highly leveraged, making its shareholder's equity small. I am skeptical about trusting this as an accurate analysis of the actual health of the company. The return on equity looks extremely high on its face but digging deeper shows a company that has very high liabilities in long-term debt. For return on equity ((ROE)), I look for a 5-year average of 16% or more. So, Colgate-Palmolive Company exceeds this requirement although I do not believe this is an accurate representation of the company’s potential.

Let’s compare the ROE of this company to its industry. The average ROE of 127 Household products companies is 33.18%.

Therefore, Colgate-Palmolive Company’s ROE seems to be an outlier and we shouldn’t put too much weight on this one fundamental.

Return on Invested Capital

The return on invested capital shows a decreasing effectiveness over the past 5 years. The company has continued to increase capital expenditures year-over-year for the past few years. The amount of return they are getting for each dollar spent is decreasing each year. It is good to see the company continuing to reinvest in the business, but I would like to see the company maintain at least a steady return on those investments. For return on invested capital ((ROIC)), I also look for a 5-year average of 16% or more. So, Colgate-Palmolive Company exceeds this requirement.

Gross Margin Percent

The gross margin percentage ((GMP)) has been relatively stable over the last five years with some recent decline, most likely due to inflation or competitive price pressure. Even with the recent reduction by a few percentage points, Colgate has maintained very healthy gross margins of around 60%. While the gross margin is great, the operating costs have continued to eat into its bottom line, which does not show up in this indicator. I typically look for companies with gross margin percent consistently above 30%. So, Colgate-Palmolive Company crushed it.

Financial Stability

Looking at other fundamentals involving the balance sheet , we can see that the debt-to-equity is much greater than 1. This is a sign of a company that is over-leveraged.

Colgate-Palmolive Company's Current Ratio of 1.16 indicates it can at least pay off short-term debt with its current assets. Most of the company’s leverage is in long-term debt.

Colgate is currently over-leveraged, but it has enough cash to pay off its short-term obligations. Normally, I would be extremely concerned about the leverage of Colgate but due to the necessity of its products and the brand, I do not expect large downward fluctuations in sales. That being said, the high debt to equity still worries me and dissuades me from investing.

Colgate-Palmolive pays a regular dividend of around 2.5%.

This analysis wouldn’t be complete without considering the value of the company vs. share price.

Value Vs. Price

The company’s Price-Earnings Ratio of 39.2 indicates that Colgate-Palmolive is overvalued when comparing its current P/E Ratio to a long-term market average P/E Ratio of 15.

The Estimated Value of the Stock is $58.96, versus the current stock price of around $76. This indicates that Colgate-Palmolive Company is currently selling above its value.

Summarizing the Fundamentals

After analyzing the fundamentals of Colgate, I have mixed feelings. On the one hand, the company maintains good gross margins and continues to grow sales year-over-year. The share price continues to grow, and the company is consistent and stable in dividends and share buybacks. On the downside, the company is extremely over-leveraged and generates a reduced return on every dollar invested. The earnings per share have also been on a negative decline in the last few years and increased competition could impact on the company in the long term.

In terms of valuation, my analysis shows that Colgate-Palmolive Company stock is overpriced.

Colgate-Palmolive Company Vs. The S&P 500

Now, let’s see how Colgate-Palmolive Company compares versus the U.S. stock market benchmark S&P 500 (SP500) over the past 10 years. From the chart below, we can see that Colgate is consistently well below the overall market in terms of returns. From my analysis, I see nothing in the future that would change to make Colgate outperform the market. On the positive side, the declines in Colgate are much less compared to the overall market declines. The stability of Colgate is shown in this chart, but if you plan to be a long-term investor, you would still end up with much better gains investing in the overall market instead of investing in Colgate.

Forward-Looking Conclusion

Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 7.57%.

The Expected Annual Compounding Rate of Return is -11.96%.

Does Colgate-Palmolive Company Pass My Checklist?

1. Company Rating 70+ out of 100? Yes (72.4)
2. Share Price Compound Annual Growth Rate > 12%? No (3.8%)
3. Earnings history mostly increasing? No
4. ROE (5-year average 16% or greater)? Yes (8215%)
5. ROIC (5-year average 16% or greater)? Yes (28.2%)
6. Gross Margin % (5-year average > 30%)? Yes (59%)
7. Debt-to-Equity (less than 1)? No
8. Current Ratio (greater than 1)? Yes
9. Outperformed S&P 500 during most of the past 10 years? No
10. Do I think this company will continue to successfully sell their same main product/service for the next 10 years? Yes

Colgate-Palmolive Company scored 6/10 or 60%. Therefore, I would be hesitant to add this company to my portfolio.

Is Colgate-Palmolive Company currently selling at a bargain price?

1. Price Earnings less than 16? No (39)
2. Estimated Value greater than the Current Stock Price? No (Value $58.96 < $76 Stock Price).

Colgate-Palmolive Company has seen steady revenue growth and continued stability even during economic uncertainty. The stock price has seen steady rises over the past 10 years.

However, the company has never outperformed the overall market in the last ten years. Colgate is extremely over-leveraged and continues to eliminate its bottom line through operating expenses even while sales are increasing. Competition within its space is continuing to rise and could put further pressure on the company in the long term. Based on these factors I do not believe the downside risk of the stock is worth the stability and small gain on the upside.

In conclusion, I will not be entering a position in Colgate-Palmolive Company stock. I know that there are better stocks to add to my portfolio with higher upside potential and less risk.

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