Key Takeaways:
Current price: $62.8 Price target: $67
Position size: 1.8% 1 year performance: -18.7%
Colgate released its 4Q18 and 2019 initial guidance today. While 4Q18 sales results were slightly better than expected, margins and the initial 2019 guidance were below. Organic sales were sequentially accelerating reaching +2%. Emerging markets are improving, even with China’s continued de-stocking. Two markets had specific issues this past quarter though:
· France: yellow vest impact on consumption -40bps on growth
· US: shift of major promotional activity from 2018 to 2019. This had a 120bps impact on organic growth pushed from 4Q18 into 1Q19
Gross margins declined 100bps and expenses increased, causing a 220bps operating margin contraction. In 2019, the company is planning to reinvest behind its brands to push organic sales growth. As the management team recognizes prior errors (mostly thinking its portfolio was good enough to win), we can now expect portfolio evolution, as well as a push towards different distribution channels. We think expectations have been lowered enough now and are attainable.
2019 Guidance:
2-4% organic growth. Efforts to drive growth are:
1/new launches (relaunch of Colgate Total and Hill’s Science Diet)
2/ invest in ‘naturals” initiatives
3/introduce some brands into new markets
4/ increase e-commerce offerings
5/ invest in professional skin care brands
Gross margin expansion. Underlying commodity costs: 2018 7% increase in commodity increase, in 3Q 8%, 4Q 9% 2019 plan is for 6% increase in underlying commodity costs for entire year
Increased advertising expenses & increased tax rate will cause EPS to decline mid-single digits
FX expected to be negative 2-2.5%
The Thesis on Colgate
- High exposure to fast growing emerging markets (36% of Operating Profit from Latin America; 50%+ from EM)
- Defensive Product set (soap and toothpaste). Product line less vulnerable to trade downs due to low private label exposure in the categories
- Strong balance sheet (net debt/ebitda 1.4x) and highest ROIC in the sector
- 2.64% dividend yield
$CL.US [tag CL]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109