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Colgate-Palmolive: Will the stock make you smile?

Opdateret: 21. jan.


Through its 207 years of existence, Colgate-Palmolive has survived several recessions, depressions, market crashes, wars, and whatever else has happened since 1806. Yet, the company is still alive and well, and is the global market leader inselling 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 whether now is the right time to purchase 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 at the time of writing this analysis, I do not own any shares in Colgate-Palmolive or any of its direct competitors. If you are interested in copying my portfolio or viewing the stocks I currently own, you can find instructions on how to do so here. I have no personal interest in Colgate-Palmolive, which means it should not be difficult to maintain an unbiased analysis.If you want to purchase shares or fractional shares in Colgate-Palmolive, you can do so through eToro. eToro is a highly user-friendly platform that enables you to begin investing with just $50.



Colgate-Palmolive is 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 been known as Colgate-Palmolive ever since. Colgate-Palmolive operates 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 worldwide, with sales well diversified across 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. Additionally, it holds significant 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 give Colgate-Palmolive a brand moat, as they are trusted by consumers worldwide. The high consumer confidence in Colgate-Palmolive is exemplified by its ranking 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 is hard to judge him based on his results as CEO. During his tenure, the company has faced challenges such as a pandemic and macroeconomic headwinds, which have made it difficult for any company to operate effectively. One thing I like, though, is that Noel Wallace has extensive experience in the company and has managed to climb the ladder by performing well in various positions. I also appreciatethat he was previously the 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 of 77 out of 100 at Comparably, which places him in the top 15% of similar-sized companies. This is impressive, especially when you consider what he had to go through in his first years as CEO. Overall, I am confident in Noel Wallace because of his extensive experience in the company and industry, as well as his focus on the Pet Nutrition segment.


I believe that Colgate-Palmolive has a strong 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 invested capital, also known as ROIC. We want to see a 10-year history, with all the numbers being above 10% in each year. Colgate-Palmolive has consistently delivered strong financial performance over the past ten years, with all years showing a growth rate well above 10%. 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 just one year. However, I would like to see a return on invested capital (ROIC) above 20% again in 2023. Nonetheless, if Colgate-Palmolive continues to deliver a return on invested capital (ROIC) like they have done in the last ten years, I would be a happy investor in the company.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it moving forward. As you are accustomed to seeing numbers in percentage form, I have decided to share both the actualnumbers and the year-over-year percentage growth. Colgate-Palmolive's equity has dropped since 2013, which is our oldest benchmark. It is never nice to see a company like Colgate-Palmolive frequently making acquisitions and selling divisions. This makes me hesitant to place too much importance on equity growth.



Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Free cash flow has remained steady over the years, as has levered free cash flow. There are two outliers in 2020 and 2022, which can be explained by the impact of the pandemic in 2020, which had a positive effect on some of Colgate-Palmolive's segments, and the challenging macroenvironment in 2022 that has negatively affected Colgate-Palmolive. It is something I will revisit later in the analysis.



Another important aspect to investigate is the level of debt, specifically whether a business has a manageable debt that can be paid off within a period of 3 years. We do this 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 of earnings in debt. It is higher than I would like to see, and it is slightly concerning. This is something that needs to be monitored, despite the fact that the debt can be explained by the acquisition of the dry pet food manufacturing plants from Red Collar Pet Foods.



Based on my findings thus far, I believe that Colgate-Palmolive is a reputable company. However, no investments are without risk, and Colgate-Palmolive also has some risks. One risk is the possibility of higher prices for 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 hovered around 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 generates most of its sales outside of North America, while reporting in dollars. It means that a strong dollar will impact their results. As an example, management mentioned that Europe experienced an 11% headwind in foreign exchange in 2022, which clearly had an impact on the results of Colgate-Palmolive. Management also mentioned that foreign exchange is still a challenge for the company. Competition. In their annual report, Colgate-Palmolive mentions that they face vigorous competition worldwide from strong local competitors, private labels, and other large multinational companies, some of which have greater resources than Colgate-Palmolive. Some of these multinational competitors are Procter & Gamble and Unilever, both of which have higher resources than Colgate-Palmolive. This means that they may be able to outpace Colgate-Palmolive. While local competitors have the advantage of better understanding local consumers and not dealing with foreign exchange headwinds.


There are also potential 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 brushes their teeth less than once a day. As the middle class is growing around the world, one would expect that the frequency of people brushing their teeth would increase. Colgate-Palmolive is a global leader in both toothpaste and manual toothbrushes, with 45% of their net sales currently coming from emerging markets. If the economic trend of a growing middle class continues, it could be a great opportunity for Colgate-Palmolive. Growing in pet nutrition. Hill's Pet Nutrition has performed well for Colgate-Palmolive, delivering double-digit growth in the last 10 quarters. Management has expressed confidence in their ability to sustain profitable growth in the future, citingtheir new capacity improvement as a key factor. Furthermore, the global pet food market is expected to continue growing. According to the Pet Food Industry, the global dog food market is projected to experience a 4,7% compound annual growth rate (CAGR) until 2027. A Safe Dividend. Colgate-Palmolive has paid a dividend for 128 consecutive years and has increased its dividend for 60 consecutive years. Hence, it seems like one of the safest dividends available. This was also indicated by management during the fourth quarter 2022 earnings call, where they stated that there would be no changes in their capital allocation. They expressed their intention to continue paying a healthy dividend and mentioned that, with the assistance of the board, they can develop a long-term dividend strategy.



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 from fiscal year 2022. I chose an estimated future EPS growth rate of 8% (which is what analysts expect). The estimated future PE is 16 (which is double the growth rate, as the historical PE for Colgate-Palmolive has been higher). Additionally, we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $18,19. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Colgate-Palmolive at a 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 were 696. I tried to look through their annual reportto see how much of the capital expenditures were used on maintenance. I couldn't find it, though, so as a rule of thumb,you can expect 70% of the capital expenditures to be used on maintenance. This means that we will use 487 in our further calculations. The tax provision was 693. We have 830,213 outstanding shares. Hence, the calculation will be as follows:(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 Colgate-Palmolive's Free Cash Flow Per Share at 2,23 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $26,62.


I believe that Colgate-Palmolive is an intriguing company that has the potential to thrive in any economic climate, as they provide essential products to consumers. Colgate-Palmolive has a very strong brand moat. There are some uncertainties regarding management, but I feel confident in their abilities due to their experience and the actions they have taken. Colgate-Palmolive is facing some short-term headwinds due to high raw material prices and the strength of the dollar, but these challenges are not permanent. Competition is fierce, but Colgate has been operating their business for more than two centuries. I am 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-well-at-night" stock that would fit well in most portfolios, even though I do not anticipate a significant increase in share price. However, I would not enter a position unless it trades at my desired price of $33,27, which corresponds to the Ten Cap valuation.


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