Key Takeaways:
Current price: $71 Price target: $77 (NEW)
Position size: 1.8% 1 year performance: +7%
Colgate surprised to the upside with organic sales growth of 3% (the highest in the past 9 quarters), driven by improvement in North America, while China remained weak. The management team expects China to improve in 2H. Colgate is still losing market share globally but on the positive side, their Total brand gained back some shares in the US after its relaunch in February. EBIT margins contracted 180bps (raw material costs inflation was partially offset by cost savings and pricing; but negatively impacted by a rise in advertising). Advertising spend will remain ~11% of sales in 2019, an increase vs. last year, but necessary to relaunch its brands. We are increasing our price target after updating our model.
1Q19 results details:
3% organic growth composed of 1% volume, 2% price
2/3 of planned price increases have been taken already, with the remaining 1/3 should continue to boost sales growth
Toothpaste pricing in the US was partially driven by a reduction of product per tube which should also benefit volume growth ahead as it leads to a shorter repurchase cycle.
Outside of the US, list price increases will be done (rather than reducing size of product)
By geography:
Africa/Eurasia +7%
LatAm +6%
Pet Nutrition Hill’s +6%
North America +3.5%
Europe (0.5% vs. Street: +2.1%) and Asia Pacific (-2.5% vs. Street: +0.5%) both missed consensus expectations
2019 guidance reiterated:
2-4% organic growth
Gross margin expansion (30-50bps)
Increase in advertising expenses
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