We reiterate our long term Neutral recommendation on global
consumer goods dealer,
Colgate-Palmolive Company
(
CL
), driven by robust third quarter performance, an impressive
guidance, various strategic initiatives as well as a solid
financial position. However, we remain on the sidelines in
anticipation of currency devaluation in Venezuela that may limit
the company's profitability. The stock also maintains a Zacks #3
Rank that implies a short term Neutral rating.
Despite the tough economic conditions, the company witnessed
improved margin performance in third-quarter 2012, riding on the
back of funding-the-growth initiatives and higher pricing.
Consequently, Colgate-Palmolive's earnings for the quarter
increased 5% from the prior-year period to $1.38 per share.
However, earnings remained in line with the Zacks Consensus
Estimate. Moreover, on an organic basis, the company's sales
escalated 5% year over year with global volume improving 3%.
Looking ahead, Colgate-Palmolive continued to expect to register
double-digit earnings per share growth for fiscal 2012 and gross
margin expansion in the range of 75-125 basis points.
The oral, personal and home care dealer commands a market-leading
position in these categories. We believe management's continued
focus on product innovation, globally recognized brands and broad
international presence in both developed and emerging markets
provides a platform to the company to take advantage of growth
opportunities and thereby augment profitability.
With an aim to improvise unit volume, organic sales and further
consolidate its global leadership position, the company recently
announced a four-year Global Growth and Efficiency Program or
2012 Restructuring Program. The program is anticipated to save in
the band of $365-$435 million annually from the fourth year of
the program and will slash its workforce by 8% from the current
level of 38,600. Considering the company's strong brand portfolio
along with the healthy financial position and its fundamental
capabilities of improving top and bottom line, it can be stated
that Colgate-Palmolive will surely achieve its long-term
objectives.
Colgate-Palmolive is focusing on acquiring businesses that have
the potential to generate higher top-line growth and margin. To
work toward this strategy, the company acquired Sanex business
and divested its laundry detergent brands in Colombia.
Colgate-Palmolive believes that these transactions will
contribute 1% earnings growth in fiscal 2012.
Apart from this, the company remains focused on its product
innovations to drive top-line growth. The recent alliance with
Omron Healthcare will help the company formulate innovative ways
for oral care solutions, marking an improvement in the same for
consumers around the world. Management remains confident on this
partnership with the opinion that Omron's modern techniques and
strong development skills will help boost Colgate Palmolive's top
line while developing a healthy customer-vendor relationship.
Colgate-Palmolive also boasts a strong balance sheet that offers
financial flexibility to drive future growth. Further, the
company remains committed toward enhancing shareholders return,
which is evident from its robust dividend payment history and 50
million shares repurchase program announced in September 2011.
On the flip side, with the possibility of currency devaluation in
Venezuela, Colgate's profitability may suffer as it generates
approximately 5% of its total sales from the country. It is
strongly believed that due to rising fiscal deficit and pressure
on Forex market, Venezuela government may opt for currency
devaluation in 2013 after the gubernatorial and local elections.
This will help Venezuela to partially reduce its fiscal deficit,
but at the cost of high inflationary situation in the economy.
Further, the company remains prone to any change in foreign laws
and regulations that could negatively impact operations, foreign
consumer preferences, disruptions or delays in shipments, and
currency fluctuations. Colgate-Palmolive's international business
accounted for approximately 80% of sales in fiscal 2011.
Similar to any company dealing with consumer products,
Colgate-Palmolive also faces intense competition from other
well-established players in the consumer goods industry. Rivals
such as
Church & Dwight Co. Inc.
(
CHD
),
The Clorox Company
(
CLX
),
Procter & Gamble Co.
(
PG
), etc. continue to combat on the basis of pricing, promotional
activities and new product introductions. Failure to compete on
any of these lines may hamper Colgate-Palmolive's market share,
resulting in reduced top and bottom lines.
As evident from the above discussions, Colgate-Palmolive seems to
be doing well on the earnings, sales, and financial front.
However, general industry and competitive challenges keep us on
the sidelines.
CHURCH & DWIGHT (CHD): Free Stock Analysis
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COLGATE PALMOLI (CL): Free Stock Analysis
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PROCTER & GAMBL (PG): Free Stock Analysis
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