Current price: $66 Price target: $77
Position size: 1.67% 1 year performance: +14%
Key Takeaways:
Colgate’s 3Q19 organic sales growth of 4.5% (+1.5% pricing) was the highest in the last 3 years, although helped by easier comps (the truck drivers’ strike in Brazil last year had impacted them). Brazil and China saw a nice rebound from last year, but North America is slowing down, which is impacting gross margins, in addition to higher raw material and packaging costs. Colgate also spent more in advertising and marketing to help lift sales: competition remains tough, especially in toothpaste and manual toothbrushes. The segment that saw the best performance this quarter was Hill’s pet nutrition, up 10% y/y thanks to e-commerce and more natural ingredients. Their 2019 guidance was changed slightly, seeing sales growth between 3-4% (vs. 2-4% previously), but now expects a slight decline in gross margin (vs. slight expansion before). We remain confident the new CEO can continue to bring the company back to top line growth, and eventually margin expansion.
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