Colgate-Palmolive: Will the stock make you smile?
Through its 207 years of existing Colgate-Palmolive has survived several recessions, depressions, market crashes, wars and whatever else that have happened since 1806. Yet, the company is still alive and well, and is the global market leader in selling toothpaste. Not many companies have a history like Colgate-Palmolive, which means it could be a safe place to invest if we are facing economic headwinds. In this analysis I will investigate if now is the time to buy Colgate-Palmolive.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that the time of writing this analysis, I do not own shares in Colgate-Palmolive or in any of their direct competitors. If you want to copy the portfolio or want to see which stocks I hold, you can read how to do so here. I have no skin in the game when it comes to Colgate-Palmolive, meaning it shouldn't be hard to keep this analysis unbiased.
Colgate-Palmolive in an American company that was founded in New York City in 1806. It started as a starch, soap, and candle factory until it introduced its first toothpaste in 1873. It merged with Palmolive in 1928 and has since been known as Colgate-Palmolive. Colgate-Palmolive operated in four segments: Oral Care (43 % of net sales), Pet Nutrition (21 % of net sales), Personal Care (19 % of net sales), and Home Care (17 % of net sales). They sell their products all over the world, and sales are well diversified in different regions as only 21 % of net sales are in North America. Colgate-Palmolive is the global market leader in toothpaste, manual toothbrushes, and liquid hand soap, while also having large market shares in mouthwash, bar soap, liquid body cleansing, liquid fabric conditioners, and hand dishwashing. They own many famous brands such as Colgate, Palmolive, Sanex, Ajax, PCA Skin and Hill's Pet Nutrition. These brands are what gives Colgate-Palmolive a brand moat, as they are trusted by consumers around the world. The high consumer confidence in Colgate-Palmolive is exemplified by Colgate-Palmolive being ranked as 15th on the list of the Most Trusted Brands by Morning Consult in 2021.
Their CEO is Noel Wallace. He first joined Colgate-Palmolive in 1987, where he held various positions until he became the CEO in 2019. It is hard to find much information about Noel Wallace, and it hard to judge him on his results as during his tenure as CEO, we have had a pandemic and later some macroeconomic headwinds that has made it difficult for any company to operate. One thing I like though is that Noel Wallace has extensive experience in the company and has managed to climb the latter by performing well in various positions. I also like that he is the former COO of Hill's Pet Nutrition, as it is the fastest growing segment at Colgate-Palmolive. His knowledge about the Pet Nutrition business made him purchase three dry pet food manufacturing plants from Red Collar Pet Foods to ramp up production, which I think is a good idea. Employees seem to like him as well, as he has a CEO rating at 77 out of 100 at Comparably, which places him in top 15 % of similar size companies, not bad when you consider what he had to go through in his first years as CEO. Overall, I'm confident in Noel Wallace because of his vast experience in the company and industry, and because of his focus on the Pet Nutrition segment.
I believe that Colgate-Palmolive has a brand moat. However, there are some uncertainties regarding the management. Now let us investigate the numbers to see, if Colgate-Palmolive lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all years. Colgate-Palmolive has delivered some great numbers in all ten years as they are well above the 10 % in all years. The outlier is 2022, which is the only year that is below 20 %. 17,7 % isn't bad and one shouldn't give too much importance to the ROIC in one year. However, I would like to see a ROIC above 20 % again in 2023. Nonetheless, if Colgate-Palmolive continues to deliver a ROIC like they have done in the last ten years, I would be a happy investor in the company.
The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. Colgate-Palmolive's equity has dropped since 2013, which is our oldest benchmark. It is never nice to see but a company like Colgate-Palmolive often make acquisitions and often sell divisions, meaning that I don't want to give too much importance to equity growth.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has left remaining after paying all its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. Free cash flow has been steady throughout the years as have levered free cash flow. There are two outliers in 2020 and 2022, which can be explained by the pandemic in 2020, which was good for some of Colgate-Palmolive's segments, and the macroenvironment in 2022 that has been hard on Colgate-Palmolive. It is something I get back to later in the analysis.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by earnings. Doing the calculation on Colgate-Palmolive, I can see that Colgate-Palmolive has 4,9 years earnings in debt. It is higher than I would like to see, and it is slightly concerning, and something that needs to be monitored, despite the debt can be explained by the acquisition of the dry pet food manufacturing plants from Red Collar Pet Foods.
Based on my findings so far, I believe that Colgate-Palmolive is a good company. However, no investments are without risk and Colgate-Palmolive has some risks as well. One risk is higher prices on raw materials. Colgate-Palmolive had to deal with much higher prices on raw materials in 2022, which resulted in lower margins. Colgate-Palmolive's gross profit margin has usually hoovered around the 60 % (in the last four years prior to 2022, its range has been between 59,5 % and 60,8 %), but in 2022 Colgate-Palmolive only managed to deliver a gross profit margin of 57,0 %. And in their fourth quarter earnings call in 2022, management mentioned that prices in raw materials continue to be a headwind for the company. A strong U.S. dollar. Colgate-Palmolive generate most of their sales outside of North America, while they report in dollars. It means that a strong dollar will impact their results. As an example, management mentioned that Europe had 11 % headwind in foreign exchange in 2022, which obviously impacted the results of Colgate-Palmolive. Management also mentioned that foreign exchange is still a headwind for the company. Competition. In their annual report, Colgate-Palmolive mentions that they face vigorous competition worldwide from strong local competitors, private labels, and from other large multinational companies, some of which have greater resources than Colgate-Palmolive. Some of these multinational competitors are Proctor & Gamble and Unilever that both have higher resources than Colgate-Palmolive, meaning they may be able to outpace them. While local competitors have the advantage of better local consumer insights and having foreign exchange headwinds.
There are also positives if you decide to invest in Colgate-Palmolive. Toothpaste growth opportunity. Most people may not think about toothpaste as a growth opportunity, but you may be surprised to hear that 68 % of the world's population brush their teeth less than once a day. As the middle-class is growing around the world, you ought to think that the frequency that people brush their teeth will increase, and Colgate-Palmolive is global leader in both toothpaste and manual toothbrushes, while 45 % of their net sales is currently from emerging markets. If the economic trend of a growing middle-class continues, it could be a great opportunity for Colgate-Palmolive. Growing pet nutrition. Hill's Pet Nutrition has performed well for Colgate-Palmolive as it has delivered a double-digit growth in the last 10 quarters, and management mentioned that with their new capacity improvement, they feel they are in a very good position to deliver sustained profitable growth moving forward. Furthermore, the global pet food market is expecting to continue to grow, according to the Pet Food Industry, the global dog food market is expected to grow sales by a 4,7 % CAGR until 2027. A safe dividend. Colgate-Palmolive has paid a dividend for 128 consecutive years and have increased their dividend for 60 consecutive years. Hence, it seems like one of the safest dividends around, which management also indicated in the fourth quarter 2022 earnings call, as they said there are no change in their capital allocation and they like to pay a healthy dividend, and with the help of the board, they can develop the dividend strategy longer term.
All right, we have gone through the numbers, potential and risk regarding Colgate-Palmolive, and now it is time for us to calculate a price for Colgate-Palmolive. To calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 2,13 which is the one from fiscal 2022. I chose an Estimated future EPS growth rate of 8 (which is what analysts expect), Estimated future PE 16 (which the double of the growth rate, as the historically PE for Colgate-Palmolive has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $18,19, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Colgate-Palmolive at price of $9,10 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating cash flow last year was 2.556. The Capital Expenditures was 696. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 487 in our further calculations. The Tax Provision was 693. We have 830,213 outstanding shares. Hence, the calculation will be like this: (2.556 - 487 + 693) / 830,213 x 10 = $33,27 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 2,23 and a growth rate of 8 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $26,62.
I believe that Colgate-Palmolive is an interesting company that will be able to perform in any economic environment, as they sell essentials to people. Colgate-Palmolive has a very strong brand moat. There are some uncertainties regarding management, but I feel confident in management because of the experience and because of the actions they have made. Colgate-Palmolive is facing some short-term headwinds in high raw material prices and the strong dollar, but these won't last forever. Competition is fierce but Colgate has been operating their business in more than two centuries, and I'm confident that they will continue to do so, as they are global market leaders in multiple areas. I believe that Colgate-Palmolive is a sleep-good-at-night stock that would fit in most portfolios, despite not expecting a certain surge in share price. However, I would not start a position unless it trades at my TEN CAP price at $33,27.
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