Perhaps there's nothing better today than a company that is logging very good growth with a set of products that are widely seen as economically-insensitive, day-to-day essentials. That has to be at least some of the explanation for the valuation of Colgate-Palmolive (NYSE:CL). For while this is absolutely an excellent company and a worthy buy-and-hold candidate for dividend-inclined investors, today's price is certainly no bargain.
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Q4 Results - Good Growth, the Worst of the Margins?
Colgate-Palmolive reported revenue growth of nearly 5%, with organic growth of 6% split evenly between volume and price. Oral/personal care (which is the overwhelming bulk of sales) had reported sales growth above 5%. By region, North America saw marginal growth (3.5%), while Europe was actually down 2% on an organic basis. Latin America and Asia/Africa both posted double-digit organic revenue growth. (For related reading, see Analyzing Operating Margins.)
Margins continue to weigh on results. Colgate-Palmolive saw a five point headwind from input costs, so the fact that reported gross margin fell 170 basis points is actually a rather costly result in many respects. Still, the company wasn't able to offset that with further operating efficiencies; operating income fell about 2% on a 160 basis point contraction in operating margin.
2012 is Looking Encouraging
Colgate-Palmolive was surprisingly upbeat. Though hearing management blame "volatility" for its decision to change how it provides guidance was irritating, the fact is that 5 to 7% organic growth for 2012 is not irritating in the slightest, if the company can pull it off. Remember, Colgate-Palmolive's two largest rivals, Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL), are both explicitly targeting market share growth at the cost of profitability, so that should be a fairly rough environment in which to post that sort of growth.
Investors may have reason to hope for a one-two punch of better growth and improving margins, to really improve reported results. Throughout 2012 Colgate will be annualizing some pretty unappetizing input cost increases, but should also be seeing some deceleration in that inflation, unless things go really haywire in the energy and petrochemical markets.
A Name to Play for Ex-U.S. Exposure
Investors with just a casual familiarity with Colgate may be surprised to learn just how global this company is. Less than one-quarter of the company's sales come from within North America, which is considerably less than many well-known consumer names, like P&G, Coca-Cola (NYSE:KO), Newell Rubbermaid (NYSE:NWL) and Clorox (NYSE:CLX).
In fact, roughly 45% of the company's sales come from emerging markets. That's great for the company's growth prospects, but it also introduces a different set of risks. Not only does currency become a much bigger factor in results, but it leaves the company vulnerable to governments that don't always make fair or intelligent decisions. As a recent example, Venezuela has instituted price controls on various personal care items (like soap, etc.), on the basis of what its government deems a "fair" profit margin. This is not a Colgate-specific problem, but few others like Unilever or Johnson & Johnson (NYSE:JNJ) match Colgate's 5% exposure to this country.
The Bottom Line
I understand why Colgate-Palmolive is a popular company and stock. Management has stayed focused and has a good record of internal product development, to say nothing of consistent financial performance. It really is a top-notch blue chip dividend stock.
Still, there's a fair price for everything and Colgate stock seems beyond that. Not only are P&G and Unilever getting more aggressive, but global consumer spending growth is no certain thing in the coming year. I would be thrilled to buy Colgate stock in the mid-$70s, but today's price, even assuming relatively little deceleration in cash flow growth compared to the past decade, just seems a little too rich. (For related reading, see The Essentials Of Corporate Cash Flow.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.