Colgate-Palmolive (CL) Q3 2017 results were relatively soft with weak sales growth of 3.0% and weaker organic sales growth of 1.5%. Colgate lowered 2017 margin guidance to 20-50bps (increase from last year) from 75-125bps. Even with disappointing results, we believe Colgate is maintaining its leadership position worldwide, and will weather this current lukewarm consumer environment. We maintain our price target and position size.
Current Price: $70.5 Price Target: $75
Position Size: 2.2% TTM Performance: +1.3%
Thesis Intact. Key takeaways from the quarter:
1. Organic sales lackluster (1.5% volume, 1.5% pricing), margins slightly missed expectations
a. Segment sales:
i. North America (20% sales): -1.0% organic sales growth due to continued share loss in liquid dish & category slow down. Margins fell 280bps to 31.3%
ii. Latam (24% sales): +6.5% sales growth both from pricing and volume. Organic sales of 5.5% and margins decreased 170bps to 30.6%
iii. Europe (16% sales): 5.5% sales growth with organic sale growth of 1%. Margins at 25.2%
iv. Asia Pac (18% sales): 0.5% sales growth with organic growth of -1.0% and margins of 30.2%
v. Africa/Eurasia (6% sales): 0.5% sales growth with organic sales growth of -2.0% and margins fell 250bps to 17.5%
vi. Pets (15% sales): 2.0% sales growth with 1.0% organic growth. Margins fell 80bps to 28.1%
b. Gross margin fell slightly to 60.0%.
2. Comments from management on global markets and implications for 2017 sales guidance:
a. Slowing category growth worldwide continues leading to volatile competitive environment
b. Tough comps in 2H17
c. Last quarter Colgate lowered 2017 sales guidance for a second quarter in a row to now low-single-digit organic sales (from below 4-7% long term target)
d. This quarter Colgate lowered guidance on expected margin expansion to 20-50bps
e. Company discussed increase in advertising to increase sales which explains some of the margin weakness for the quarter
3. Valuation: no changes, still a great long-term holding
a. We are maintaining our $75 price target, which was already baking in a lower growth rate for 2017
b. FCF yield is 4%, dividend yield 2.2%
The Thesis on Colgate
• High exposure to fast growing emerging markets (36% of Operating Profit from Latin America; 50%+ from EM) so one of the highest growth profiles in Staples
• 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 1.15x) and highest ROIC in the sector
• 2.2% dividend yield